Friday saw a bounce in stocks globally (followed through by Japan and Australia this morning) giving traders a respite after 3 weeks of consistent battering. Having said that, European stocks open on the back foot this morning with the main borses all back in the red in excess of 1% as I write this.
Last week I wrote about the 6 main reasons why stocks are getting battered and more importantly why there has been such a fall in global enthusiasm and confidence. So respected Economists have come out and said there is nothing to panic about and global growth/confidence is still intact. I respect everyone’s opinion, but the facts speak for themselves and so do the numbers. Germany, France and Italy simply put are in a pile of rubble – fact. The ECB have disappointed and the US FED are about to cease QE altogether. Interest rates seem to have taken a back seat after disappointing numbers force Central Bankers hands forcing them to seriously consider delaying hikes. No point adding fuel to the fire. Best remedy sometimes is to hold off until the time is right. We have seen only too well when the ECB made a catastrophic error and raised rates from 1.00-1.25% only to reverse that decision the following month and slashing rates to their current levels of 0.05%. I have repeatedly said it is CRUCIAL from CB Gov. to get the timing right because the consequences could be disastrous.
Economic data this week is unlikely to ease concerns about a slow down in global growth and lower inflation. Chinese activity -GDP-Industrial Production & Retail Sales (Tuesday), US CPI (Wednesday), German PMI (Wednesday), UK BOE Minutes (Wednesday), UK Retail Sales (Thursday), EU PMI (Thursday) and UK GDP (Friday) are the highlights for the week. We can surely expect some fireworks ahead of the data given that I fully expect some to be worse than expected. US corporate earnings continue this week with all eyes on how they are faring.
With a delay in FED rate hikes, we are likely to see a continued deterioration in EM currencies with the RUB, TRY, ZAR, BRL, MXN and KRW the biggest losers. I HAVE NOT GIVEN UP ON MY USD view with 1.2000 by year end. Given what we have seen in the markets the past few weeks, my predictions for 1.2000 might be delayed a few weeks, but it will get there in the end.
BOE’s October meeting minutes (Wednesday) are likely to be a key focus for GBP in addition to retail sales (Thursday) and Q3 GDP (Friday). However, the risk is that the market will not have discounted the value of the minutes sufficiently, given that they relate to the 9th October meeting and will therefore not include the recent fall in CPI inflation (to 1.20%) as well as the collapse in EU growth prospects NOT TO MENTION Stocks. In response to these developments, interest rate traders have aggressively repriced BoE base rate expectations over recent weeks and now expect barely +25bp next year, and perhaps +50bp in 2016. As such, I have to push back my interest rate hike to AFTER MAY 2015 (election). Having said that the only other window Gov. Carney might have is VERY early in Q1 so that the shock wears off going into the general election.
It remains our view that EURGBP will continue to fall in line with the distinct economic fundamentals between the UK and EU. While the fall might not be as aggressive given the recent UK CPI data and the hike being pushed into 2015 we still expect GBP to rally vs the EUR and make new lows. As previously commented, vs the USD that’s an altogether different story given how the USD is currently playing out. Overall if the UK continues to perform traders will find it hard pressed to SELL the GBP vs the USD. In fact that is what we are seeing this morning, traders BUYING GBPUSD and SELLING EURGBP.
Have a great day ahead and good luck