Weekly review.. Election result .. Liberal Democrat loses to Penguin

May 6, 2012 Weekly Market Review No Comments

No that’s not the French election… It was a true result in council elections in Edinburgh Scotland where a Pongoo the Penguin ( a man dressed up) collected 444 votes beating the Lib Dems and Greens. Is this a trend we ask. More like it sums up current politicians nicely. Good job Messrs’ Hollande and Sarkozy don’t have such a candidate to fight. Mind you in Greece who knows who will end up in a coalition if it manages one, although in truth the main parties will just have to rule by coalition

Back to business which was certainly more exciting in markets on Friday as the US Non Farm payroll data upset things. They came in as some expected worse than consensus forecast at + 115,000 lower than the + 165/- to 175/- expected. Unemployment was down to 8.1% from 8.2% but that was caused by lower work force numbers.US equities fell about 1.5% and in forex markets we were back to the Yen first and dollar second in strength. Not a mention of QE for once. Although EUR/USD initially moved up to 1.3180 it sold off to close at EUR/USD 1.3085

An even stronger Yen closed at USD/JPY 79.85 and EUR/JPY 104.50. Sterling crept up again against the Euro to EUR/GBP 81 and in coming weeks could well make up even more ground. and test the psychological 80 level.

Last week was dominated by European data. Purchasing Manager Surveys (PMI) and unemployment numbers were awful. Although Germany and a few other countries are not in recession a large part of Europe is and what’s more any ideas of stabilising look premature. Some , including me, now see a further slide in economic activity in the Eurozone. What that means for Spain and Italy in particular is lower tax revenues thereby making budget targets unreachable. What we now have to see is whether Germany will relent and allow those countries to have some time or insist on more austerity. The ECB seems to have passed the buck to the governments while offering no ideas how they might stimulate without higher borrowing. The idea that by adding the word growth to the fiscal pact all will be ok is ridiculous.

I have been a Euro bear for some time but certainly against the US dollar its been hard work. What the Eurozone would benefit from is a lower Euro and while that may not be encouraged it would certainly not concern EZ politicians. It may be that the ECB is forced into more LTRO loans in fact I think they will as the weeks ahead show how bad things are,particularly in Spain. Its been strange that US QE sees the US currency sell-off while Japanese and Eurozone versions have not. Maybe that will change although certainly in Europe previous ECB lending through the LTRO has been taken as supportive for the currency.

Much of the western world remains dogged by huge government deficits and in Europe a whole bunch of countries who have been supporting unsustainable standards of living through those deficits. The chicken as they say has come home to roost and the existing Euro rules are merely exacerbating things. There is a real crisis unfolding in Spain not dissimilar to Greece and we have not repeat have not seen the worst of things yet. Just remember there is still cutbacks already agreed that are yet to be implemented, adding more misery not only in Spain.

Its not all plain sailing elsewhere. China has seen growth levels slip ( now 7.5% expected) but markets are still convinced that the authorities there ( soon to be new) can manage things.

Its not that clear but one thing China does have is loads of cash. Reserves of over $ 3 trillion means they can indeed splash the cash if they need to. I do think they will need to use this, as a they cannot be immune to a European slow down and a domestic property price fall. However, they should avert the so called hard landing.

Its difficult to make a case for US dollar strength in the long term , goodness knows their own debt situation is also unsustainable, but right now they at least have some control over their own destiny. I stick with my EUR/USD sub 1.20 at some point this year. That’s not to say we go straight down or that we don’t revisit higher levels.

Even the EU commission is getting in on the growth kick, presenting a case for more investments in major infrastructure projects. That’s all very well but its just helping around the edges and no solution. In any event we have yet to see how the Germans react to all this and lets face it they are the biggest contributors. Have we forgotten they have an electorate too and Mrs. Merkel is less than 18 months away. What’s more elections in North German Schleswig- Holstein ( nice beer) this weekend look like giving her a bloody nose. At the moment, though more important is the French outcome, which is more likely to cause her immediate headaches. Its a tough job being king pin. She can certainly expect that Hollande ,presuming he wins, will be very demanding for a couple of weeks before French National assembly elections occur. After those he may well become more of a realist but is unlikely to find a personality.

Headlines
US… NFP +115/- worse than the expected (170/-) although March + 34/- revision helps as does Unemployment 8.1% (from 8.2%) although that was based off a lower workforce. Not bad enough to really rattle markets or cause a major QE demands.
Europe… ECB unchanged and unpromising. PMI data points to a further slowdown everywhere in Europe, Unemployment rises adding more ammunition to anti austerity movement.

Next week possible market moving events.

Sunday/Monday 6/7 May.. French & Greek elections.. In France the gap has closed and may be very close. In Greece up to 10 parties could get representation. ( same old politicians though)

Monday 7 May.. EZ Sentix ( Investor Confidence) Expected –15.3 From –14.7. Whatever the number it will be weaker right now.

Wed 9 May.. .. US Wholesale inventories

Thurs 10 May…. Australian employment …. German Trade & current account ( More expose of EZ divergence)….. UK.. BOE Meeting ( No Change in Rates or QE)

Frid 11 May…. US University of Michigan Confidence ind…… Canada.. Employment

As you can see not much on the data front next week although markets should have enough to feed on with French and Greek election results. Will equities take further fright or will US markets hold things together? More wobbles looks most likely.

And as 15/1 shot ¨I´ll have Another ¨wins the Kentucky Derby Nicolas Sarkozy looks to the Gods to provide the same result