Welcome to the 2nd half of 2010. Like you, I can’t believe we are already half way through the year and I have no idea where the other 6 months went. It’s all a mystery of the space time continuum and I am convinced that time passes faster or slower relative to your age. I am sure that summer days when you were a child did in fact last longer because they were a far smaller proportion of your overall life span at the time so the days passing faster as you age makes far more sense in that context but such philosophical musing will have to wait, we have a market to contend with and it is full of enough surprises to age us all.
The surprises came thick and fast yesterday. The main one was that Roger Federer lost a game. I’ll give you a moment to get over that because I know it is a bit of a shock ............................. Better? Good. In another surprise, we heard that the UK housing market is cooling and the US employment is slowing and China’s economy is slowing as well. It was all too much for traders who didn’t know whether they were on foot or horseback.
The detail goes like this; Federer was beaten by Tomas Berdych (previously unknown to me at least) who joins a very confident looking Andy Murray in the next round at Wimbledon. A report from Nationwide showed that UK house prices rose by just 0.1 percent in June. That is down from 0.5% in May and 1.1% in April; a trend is emerging methinks. Fears of a second housing market recession are prevalent; especially after the poor mortgage lending data we got from the Bank of England earlier in the week and anecdotal evidence of the difficulty potential borrowers are having in convincing banks and building societies to lend. Sterling slipped during the day. The Pound was also hit by traders taking profits from the gains we have seen the Pound make in the last fortnight and a curious delay in the release of the final calculation of UK economic growth data which, it was announced, may have been based on flawed calculations. No one knows if that is good or bad so traders remain nervous until Monday when the data will be released. I think we can expect traders to adopt a defensive position ahead of that news, especially as the US markets will be taking a long weekend break and liquidity will be reduced.
The ADP report which measures private company payrolls in America showed growth of just 13,000 US jobs last month and that is a very poor figure compared to the far higher market forecasts. Most worrying was the figure showing small businesses actually shed 1,000 jobs in the same period; a figure that will make the US government very nervous as they try to steer the US economy out of recession. However, in spite of this poor data, the US Dollar strengthened for most of the day as investors exited riskier investments in order to buy into US bonds. That same ‘flight to quality’ as it is known, was seen to strengthen the Swiss Franc which hit its strongest ever level against the Euro and the Japanese Yen also strengthened as Japanese investors brought their money home from overseas investments. Those investments included interest bearing certificates in Australia and New Zealand and the consequence was weakness in the Australasian Dollars.
Some of that weakness derived from data showing a slowdown in the Chinese economy. The Chinese Purchasing Managers Index, a measure of business confidence, dropped from 53.9 to 52.1 in June. That is still above the 50 level which marks the change from expected growth to expected contraction but it was a poor reading nonetheless. If China’s economy slows, imports decline, that weakens commodity markets and commodities are the lifeblood of Australian and New Zealand exports.
Back to the Euro though and there was great relief yesterday that EU banks took up just €132 billion of the ECB debt being tendered yesterday. The fact that €442 billion of bank debt expires today meant analysts were very nervous of a massive ECB borrowing binge. Thankfully that didn’t happen and that boosted the feeling that EU banks are not as indebted as many had feared. The Euro had rather a better day than it has of late; partly due to profit taking on its previous weakness but it still failed to break out of recent ranges. That inability to make significant gains will have had something to do with rumours that the credit ratings agency, Fitch is considering a downgrade to Spain’s sovereign debt. Whether that is significant in the overall scheme of the Eurozone debt crisis is open to debate but it does leave an edge of nervousness over the Euro and traders will probably seek other places to invest where that air of impending damage doesn’t exist.
Back in the UK, the rift between the members of the Bank of England’s Monetary Policy Committee was confirmed yesterday when Adam Posen completely contradicted Andrew Sentence in stating that higher interest rates were not necessary as there was no immediate panic over the level of inflation. Mr Posen was in the majority when the committee voted 7-1 in favour of maintaining the 0.5% base interest rate last month and one of his colleagues David Miles has also be quoted in the Daily Mail as agreeing that there is no need to hike interest rates yet. So it would appear that the views of these gentlemen are more likely to be followed than Mr Sentence’s who sees inflation as a real threat to stability. However, if the bank of England was sticking to its core remit; that of keeping inflation between 1% and 3%, they could be considered to be very clear failures.
Today’s main market mover is likely to be the US weekly jobless claims, especially if they are in line with the ADP report because the combination of two poor employment reports will make traders cautious as we head towards tomorrow’s June employment report. We will also get a US manufacturing sentiment index, pending home sales and construction spending. So the afternoon will be a busy one. Before that though, the Bank of England will release its quarterly credit conditions survey.
And finally, if the England football team think they are getting it in the neck for their pathetic performance, they should be glad they are not Nigerian. The whole Nigerian football team, which finished at the bottom of its group at the World Cup, has been banned from competitive matches for two years by President Goodluck Jonathan as a punishment for their poor showing. FIFA is not happy because it does not like political interference in the sport. This is the same FIFA that doesn’t like technological interference either but is fine with Chinese actors playing the part of supporters for North Korea. It’s a priority thing I guess.