Macro data could only have been described as mixed yesterday. Business expectations in Germany were much better than expected and an improvement on the previous month; industrial production improved in Singapore versus the previous month, albeit not quite as much as expected; consumer confidence in South Korea improved but the same fell in Brazil, although perhaps it wasn’t as bad as feared; industrial trends were much worse than expected in the UK and much worse than the previous number; and finally new home sales dropped a lot in the United States, despite expectations of flat sales growth.
Potentially very significant news in the US came from Washington with Congress and the White House able to reach a tentative deal to avert another fiscal crisis. The agreement should allow some small increases in spending in the next two years, and combines a rise in the debt limit with an accord which prevents default. This looks like a clear win for the lame duck President, in a year that has been remarkably successful for Obama. It seems highly unusual for him not to have fiscal battles with his colleagues on the hill! It will certainly enrage the GOP base going into an election year.
Perhaps just as significant will be the Chinese Communist party’s plenum which is intended to approve a new 5 year plan. China is currently in danger of falling into the middle income trap, so this plenum could be the most important at least since the downfall of the Gang of Four. Not just for China, but for the world, after all, China is now an integral part of the global economy, its fate is now inextricably tied to the rest of us. The need to move from an export led, manufacturing based economic structure to a more domestic focussed consumption led structure will have huge ramifications economically and socially in China, and also in the rest of the world. You only have to look at the economic stresses being felt in such far flung regions as Australia and Brazil to comprehend the impact the Chinese economic slowdown has already had around the world.
At the close of today’s market, Apple will post its earnings. These are likely to be huge with rumours of a successful start for new products like the iWatch, this could give quite a lift to equity markets and risk sentiment in general. I continue to remain bullish stocks into the end of the year, my suspicion is that we are over the worst of the global slowdown data. I could be wrong, but as I’ve said many times, this has never looked like an endgame scenario, and now we have central banks talking about more monetary largesse.
What does all this mean for currencies? Looking past short term fluctuations, I continue to maintain that the conditions for a stronger dollar remain in place. There is no question that the euro now looks more vulnerable with ECB talk of expanding QE, I also remain just as negative about the pound sterling and I was intrigued to see an article in the Financial Times this morning that points out that the current account deficit has been growing in recent years in the UK and not for the traditional reasons. Britain has always been a poor exporter but this has actually been improving. It is precisely where the UK has been historically strong that the weakness has become increasingly evident – the investment account, i.e., the difference between what the UK earns from its foreign holdings and what foreigners earn on their UK assets. Perhaps the legacy of empire, but that was always a source of surplus for the UK economy but years of huge fiscal deficits have put paid to that. I have tended to look at GBP/USD charts from a longer term technical perspective, but this information could add a new more alarming twist. If the deterioration in the investment account persists we could one day see another sterling crisis. Either way, I continue not to like GBP very much..
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