Spread Betting

Sterling spent the first four days of the week around a one cent range. A couple of explorations above that range failed to improve the rate by much. A sell-off that began on Friday morning took the pound down and that was where it was trading when London opened this morning.

Monday’s delayed final revision to Britain’s first quarter gross domestic product (GDP) figures brought mild disappointment. As expected, GDP expanded by +0.3% in Q1. That was fine. But there was also a surprise in there. Earlier estimates for the peak-to-trough decline in GDP had put the figure at -6.2%. The final revision updated that figure to -6.4%. There was also confirmation that, in volume terms, the 4.9% fall in calendar 2009 was a record annual drop.

Tuesday’s inflation figures were more positive. Consumer prices went up in June when they had been expected to be steady. The core consumer price index was up by 3.1% on the year instead of the forecast 2.8%. The retail price index (RPI), upon which many wage negotiations are based, was ahead of forecast both on a monthly and an annual basis. The figures were not miles away from what investors had been expecting but were sufficiently adrift in the right direction to take sterling higher.

The other important set of data was Wednesday’s employment numbers. The overall tone of the report was positive, with 160,000 more earners and a fall in the unemployment rate from 8.0% to 7.8% but the details were unnerving. Most of the increase - 117,000 - was again the result of part-time hirings. The number of self-employed rose by 59,000: whilst this would be an optimistic sign in a booming economy it smacks of desperation in times of austerity. Nevertheless, the market was happy to see the headline numbers moving in the right direction and investors’ first reaction was to buy sterling.

Beyond the statistics not all the news was good. Standard and Poor’s warned at the beginning of the week that there was ’still a material risk’ that UK government debt could reach a level’ incompatible with the AAA rating’.

China’s Dagong Global Credit Rating Company made its first foray into the sovereign ratings game and did not give Britain a particularly favourable assessment. At AA- the UK, together with France and Japan, received a lower rating than a dozen other countries. The United States was just one grade higher at AA. Monetary Policy Committee (MPC) member Adam Posen did not help matters. He told a regional newspaper that ‘There is a chance we could slip back into recession.’

The euro continued its recovery on a broad front, adding another four cents against the US dollar that brought the tally for July to seven and a half, more than 6%. To a large extent the euro’s driver in the spread betting markets was investor nervousness about the sustainability of the US economic recovery but the euro zone did make some contributions of its own. Those contributions were not the economic data though.

ZEW’s survey of German economic sentiment fell by nearly eight points to 21.2. It was a similar story for the euro zone as a whole, where sentiment dropped to 10.7. Both figures were at least four points below forecast. Finalised data for June’s Consumer Price Index (CPI) were on target with inflation running at an annual 1.4%. Industrial production was disappointing as well, rising by 0.9% in May instead of the 1.2% investors had been expecting. Even the Euroland balance of trade was unhelpful with a seasonally-adjusted deficit of -€3.4 billion instead of the expected €0.8 billion surplus.

What did help the euro was some encouraging news from Club Med on the debt front. Greece was able to sell six-month treasury notes at a yield of 4.65%. There were bids for more than three times the €1.6 billion that were on offer. It was not the sort of performance that would have had them cheering in the streets of Berlin but, in the context of abiding nervousness about Greece, it was a result.

An equally successful bond auction by the Spanish government managed to shift €3 billion of 15-year bonds with the market apparently happy to buy even more. Portugal and Italy achieved similar successes. The Spanish sale went some way to offsetting an embarrassing revelation by Spain’s central bank.

The Bank of Spain said the country’s commercial banks had soaked up more than a quarter of all the money lent by the ECB to the euro zone banking sector. Investors did not react strongly to the news; they are waiting to see the results of the ’stress tests’, applied by the European Central Bank, on Friday.

The euro fared considerably better than the pound last week and it threatens to repeat the exercise.

FX Trading Update by www.moneycorp.com where you can open a free, no obligation Trading Facility.

Fed believes it could be ‘five to six years’ before the economy returns to normal.

Twice at the beginning of last week sterling tested support. Both times it rebounded, with Tuesday’s bounce setting it on the way to a peak on Thursday. A profit-taking sell-off on Friday brought sterling back down and it was still hovering around that level when London opened this morning.

The dollar had an uncomfortable week, undermined by another string of lacklustre US data. At -$42.3 billion the trade deficit was worse than expected. Retail sales fell again, this time by -0.5% in June. Producer prices were down by a similar proportion, halving their annual rate of increase to 2.8%. Federal Reserve Banks in Philadelphia and New York reported a slowdown in manufacturing activity in their districts. The Philadelphia Fed’s index went down from 8.0 to 5.1; New York’s manufacturing index also came in at 5.1 but to get there is had to plunge. all the way from 19.6. Friday’s consumer price index figures were in line with forecast, showing a further slowdown in inflation to 1.1%.

There was a belated reaction to the minutes of the monetary policy-making Federal Open Market Committee after analysts had looked more carefully at its contents. Tucked away in the middle of the 21-page report, was the following wordy warning; ‘Participants generally anticipated that, in light of the severity of the economic downturn, it would take some time for the economy to converge fully to its longer-run path as characterized by sustainable rates of output growth, unemployment, and inflation consistent with participants’ interpretation of the Federal Reserve’s dual objectives; most expected the convergence process to take no more than five to six years.’ The otherwise dull sentence ended with a bombshell: It could take the American economy five or six years to get back onto a normal footing.

In the spread betting markets, the pound did, in the end, make it beyond the resistance that had held it below $1.52 but it did not get far.

Its challenges this week will include Tuesday’s public sector borrowing figures, Wednesday’s minutes of the July MPC meeting, Thursday’s retail sales and Friday’s first estimate of second quarter GDP. They all present potential pitfalls for sterling.

FX Trading Update by www.moneycorp.com where you can open a free, no obligation Trading Facility.

Dollar in the background with a four-day week and few US ecostats.

An uneventful week saw sterling meander along a cent-and-a-half range. It was only as London was tidying its desk on Friday afternoon that sterling set off lower. It then went on to lose a further half cent in the Far East this morning.

The most disappointing data, at least as far as sterling was concerned, came on Friday with June’s producer price index (PPI) and the balance of trade for May. The input and output components of the PPI, representing manufacturers’ costs and factory gate prices, were lower in June by -0.2% and -0.3% respectively. The numbers supported the Bank of England’s projection that inflation will fall back towards its 2% target without the need for higher interest rates.

The UK trade figures were also unhelpful to the spread betting markets. The deficit in goods widened to more than £8 billion while goods and services together registered a £4.5 billion shortfall. Both deficits were bigger than expected and cast renewed doubt on the alleged benefits of a weak pound.

Other events during the week saw an announcement from the new Office for Budgetary Responsibility (OBR) that its boss, Alan Budd, did not intend to renew his initial three month contract and that the two other members of the triumvirate would also be leaving before the end of the year. Critics of the new setup wondered why he was leaving. Could it be because of lack of independence? Perhaps not, for the International Monetary Fund (IMF) came out later in the week with economic growth projections remarkably similar to those put together by the OBR.

The IMF agrees with the OBR that Britain’s gross domestic product will grow by 1.2%. Its forecast of 2.1% growth in 2011 is lower than the OBR’s 2.3% prediction.

The Independence Day holiday delayed the US services sector PMI until Tuesday. Just as in Britain, the figure was lower than the previous month and below forecast at 53.8. The services PMI was the week’s only important US data release.

Weekly jobless claims moved in the right direction, a welcome relief for the dollar after the previous Friday’s disappointing non-farm payrolls number. Consumer credit logged a fourth consecutive monthly decline. It was the result of a combination of banks’ reluctance to lend and consumers’ disinclination to borrow. Wholesale inventories went up by +0.5% in May, giving the impression that suppliers are still confident about sales in the future.

In both the forex and spread trading markets Sterling tried to strengthen last but was knocked back. That does not bode well for it in the immediate future. With UK statistics for gross domestic product, inflation, consumer confidence, employment and earnings all due this week there is scope for further setbacks if the numbers are not supportive.

FX Trading Update by www.moneycorp.com where you can open a free, no obligation Trading Facility.