Newsletter Issue 14June 2010

Economic Overview

Key notes from Last Week

Risk aversion was the theme of the week. Investors suffered from the worst bout of risk aversion since the financial crisis. The VIX closed the week just under 30% against a high of 37.38 on 6/8; mainly due to the Hungary shock.

• A weaker than expected  US payroll report on June 4 had investors already risk averse as the week got started and then the Hungarian comments that it could be headed for a Greek-style crisis added explosive fuel to the fire. Equity markets slumped and investors ran for safe havens. The week, however, ended with signs of returning risk tolerance - global equity markets at or near the highs of the week and the USD and JPY at the bottom of the G10 5-day relative strength profile. Japan’s Topix index is up 2.4% from its low (off 2.7% on the week) and Europe’s Stoxx 600 ended up 4.8% from its low (up 2% on the week) and the S&P 500 headed for a gain of about 4% off its low (up about 1.7% on the week).

• The BoE and ECB policy meetings were among the major events last week. As expected, both left their policy rates unchanged --- 0.50% and 1.0% respectively. Trichet’s news conference following the ECB meeting provided little new. Trichet emphasized the high level of uncertainty. Regarding the ECB’s decision to start buying EC government bonds, Trichet said it was viewed necessary to maintain global financial stability and did not alter the ECB’s policy stand since all purchases are fully sterilized. He provided no additional information about the program.

• On the subject of foreign exchange, Treasury Secretary Geithner testified before the Senate Finance Committee last week on the topic of the Chinese CNY. Geithner defended his decision to delay the report on currency manipulation as part of a strategy to get China to adjust policy but admitted he was not sure when China would move. He was quite critical of China’s lack of action and actually welcomed the pressure from Schumer and others pushing legislation. It seems clear the administration is trying to increase pressure on China to make some move before the G20 Summit at the end of the month.

Regional Markets

The United Arab Emirates trade surplus for 2010 is expected to rise 15% from 2009, a foreign trade official said on Friday. The country's surplus stood at $16.1 billion last year. Abdullah Al Saleh, director general at the Ministry of Foreign Trade, said non-oil exports in 2010 were set to jump 23% from 2009 and re-exports were forecast to rise 13%. UAE exports and re-exports totaled $209.6 billion last year. The Exports include gold, petrochemicals, aluminum and steel. Imports were set to rise between 7%-10%, these included machinery, agricultural products and cars. UAE imports stood at $193.5 billion in 2009.

Forex

EUR:  

1. The Euro fell against the U.S. dollar as data showing improvement in U.S. consumer sentiment suggested U.S. economic recovery remains on track.
2. Lingering worries about euro zone debt and technical barriers also contributed to the Euro's decline.
3. The single European currency still ended the week up nearly 1% against the dollar, but despite the gain this week, the euro is still down nearly 16% on the year.

GBP:  

1. Sterling fell sharply against the dollar and Euro on Friday after data showing an unexpected fall in industrial production sparked concerns about a fragile UK economic recovery.
2. Other data showed a jump in UK inflation expectations while input costs eased less than forecast, sparking concerns that companies could struggle with high costs and weak demand.
3. Analysts said that, longer-term, sterling still looked more attractive than the euro as investors have been encouraged by the new coalition government's determination to tackle the UK's large budget deficit; while they are concerned indebted euro zone countries may struggle to implement austerity measures.

JPY:  

1. The Japanese yen fell against the dollar after data showed U.S. consumer sentiment near a 2-1/2-year high.
2. A warning from Japan's new Prime Minister that the country could risk default if it neglects growing public debt and loses the market's trust also added to yen losses.
3. Expected tomorrow is the BoJ policy meeting results. The policy rate will remain held at 0.10%. There is a chance the details of the latest lending program will be released. If not at this meeting, they will be out in July.

 ECONOMIC INDICATORS (14-06-2010/18-06-2010)