Last Week
Last week we saw a continuation of the global rally that kicked off in March of this year, the FTSE hit highs above 5000, the S&P 500 is up 50%, Gold was above $1000 a troy ounce and Oil was well inside $73 a barrel. The key question is “how long will this last”? If we study the reasons for the rally, we quickly come to the conclusion that loose monetary policy and Quantitative Easing are the main drivers. These moves are a slight indication that the methods are filtering into the pockets of consumers globally. We must look upon these gains with caution, much of the rally is being fuelled by investors who were stung heavily by the collapse, thus, looking to claw back their losses as soon as possible. Evidence of this is the profit taking that we are currently seeing across many asset classes, Oil is down $5 from last week. The potential for a correction is growing and the house of cards being built could be destroyed by that most destructive of winds, the giant sell off.
On the positive side Global Finance Ministers at the G20 agreed to continue the stimulus packages in place and M&A activity dominated headlines with the front runner being Kraft’s move for Cadburys.
Support the Pound
Bullish manufacturing and industrial data helped sterling maintain its current position within currency markets last week, Mervyn King added to this when the MPC announced that they would not increase the current level of £175bn being pumped into the UK economy. We will see on Tuesday how all of these emergency measures are affecting the real economy with the CPI figures, year on year figures should show that prices inflated by 1.4% in the stricken economy, this will be a welcome figure in the UK as it will support continued low interest rates and quieten critics of QE who fear that all this extra liquidity will cause hyper inflation. Although we are not expecting Sterling to jump ahead on the grid, this week should allow the currency to hold its head high.
Is the Eurozone Still Deflating?
Figures released tomorrow are due to confirm that the eurozone is still deflating, although not likely to be as bad as last month, economists predict the single currency zone to have deflated by 0.2% in the year to August. ECB president will be hoping that the figure is better than this prediction so that he can justify his interest rates of 1% and not cut at his next policy meeting on October the 8th. German ZEW Economic Sentiment on Tuesday will give us an indication as to the optimism within the industrial flagship of the zone.
Sell the Dollar!
The US dollar index, which measures the dollar against a basket of 6 currencies, is at lows not seen for 12 months, the story is mostly one of risk appetite where investors move out of the safe haven of the US currency into riskier assets. The US dollar is now the worlds favourite funding currency. However, the US dollar is depreciating against its Japanese and Swiss cousins which indicate that there is another power at work to demise the dollar. This power is likely to be the return of the black cloud hovering above the dollars reserve status, the United Nations have suggested that we need a stronger alternative for global bank reserves, as a result governments and central banks are shifting their weight of dollars in a nervous move.
On Tuesday we will see the latest Retail Sales figures come out of the worlds most powerful economy, expected to come out at 1.8%. On Wednesday we have the all important CPI figure from the US, this is expected to show that prices increased by 0.4% from the month before.
By Keith Miller, FX Dealer
