Euro risk assets bounce back as economic news flow turns more positive
26/Nov/2012 • Currency Updates•
Equities and credit rebounded somewhat last week. Better than expected Chinese economic data and signs that the “fiscal cliff” impasse is close to being resolved in the US buoyed risk assets in general. In currency markets, dollar gave back its gains from the previous weeks, while the yen continued to sell off against all major currencies on fears of ramped up monetary easing from the Bank of Japan.
The minutes from the MPC November meeting were consistent with our view that further expansion of the Gilt purchase target is likely in coming meetings. The decision was 8-1; David Miles voted for an additional 25 billion GBP in purchases. The minutes combined a generally downbeat view of the UK economy with an optimistic assessment of QE’s impact so far. Therefore, we think that, absent of upward surprises in economic growth, the Bank of England will announce further purchases in the coming weeks. There were no first-tier macroeconomic news in the UK last week. Sterling reverted to its long-term trend as a low-beta version of the euro, rising by 0.5% against the dollar while dropping nearly 1% against the common currency.
Business sentiment numbers continue to paint a dismal picture of the eurozone’s economy. The composite PMI number stabilized at a clearly contractionary level of 45.8. This level has been consistent in the past with economic contraction of between 1% and 2%. Consumer confidence and bank lending figures were also weak. News was no better from the political front. European officials were unable to reach an agreement on either the umpteenth new bailout needed by Greece, or the EU budget. The euro, however, ignored all of this and rose against most major currencies, boosted by generally improved risk appetites in financial markets.
Macroeconomic and policy news out of the United States were light in a week that was shortened by the Thanksgiving holiday. What news there was came out on the positive side. The housing sector in particular continues to surprise pleasantly. Housing starts surged again, boosted by rising demand and insufficient inventory.
Since the next releases are expected to be heavily impacted by the effects of Hurricane Sandy, focus is now firmly fixed on the “fiscal cliff”, the automatic spending cuts and tax increases that will hit the US economy unless a budget agreement is struck between a Republican Congress and the White House. Positive noises from both sides have yet to translate into specific progress, but we maintain our view that the weakened Republicans are likely to be much more amenable to an agreement than last time.