Newsletter Issue 21 June 2010

Economic Overview

Key notes from Last Week

The week ended with the markets giving mixed messages regarding risk tolerance but it does appear the immediate fears of another blow up in the EC sovereign debt crisis have abated.

• Spain was the lighting rod of EC fears last week but the passage of the labor reforms promises to make the bank stress tests public and strong demand at its bond auctions went a long way in repairing investor confidence. The EC summit agreement to make the stress tests of all major EC banks public by end-July has contributed to the near-term calm. Moody’s 4 level downgrade of Greece to Ba1, junk status, on Tuesday contributed to investor risk retreat and a Spanish newspaper report suggesting the government was talking with the IMF, EC, and US about a safety net of perhaps EUR 250B (vigorously denied by government, EC and IMF) shifted focus on to Spain but also raised concerns that Spain may be the next candidate for downgrade. The successful bond auctions on Thursday, passage of the labor reforms and making bank stress tests public helped to rebuild market confidence.

• In an effort to build investor confidence and voter approval, Japan’s PM Kan announced last week a medium-term economic plan in advance of his presentation of a medium-term fiscal consolidation plan on June 22. The four major quantitative targets set out last week were 1) growth at 2%, 2) average inflation of 1% (GDP deflator) through 2020; 3) government annual spending limit of Y71T over the next three years and 4) new bond sales limited to Y44.2T through 3/2012. He also highlighted seven areas -- including environment, energy, health, tech and tourism - as sectors to get priority attention. To fund these efforts, the government plans to cut business taxes and increase the sales tax. Kan is hoping his action plan will appeal to both investors -- help to keep bond yields down -- and voters. Last week the government set July 11 as the date for the upper house elections and the DPJ under Kan is going to be working to secure a majority. The DPJ and its allies already have a majority in the lower house.

Regional Markets

The United Arab Emirates economy will grow at a pace of around 4% this year and next on the back of big infrastructure projects, its central bank Governor Nasser Al Suweidi said last Monday. Last month, the government had projected growth of around 3.2% in 2010. "The UAE is embarking on a few landmark projects like the Emirates railway, nuclear power generation for peaceful users and marine transportation network to service the region." These projects would help to diversify its economy.

Forex

EUR:  

1. The euro hovered near a three-week high against the dollar on Friday, chalking up its biggest weekly gain in over a year as European Leaders said they would publish details about the health of European Banks.
2. With markets a bit less anxious about Spain's public finances after the country attracted buyers for a debt auction last week, some analysts said the stress test results could boost trust in Europe's banking sector.
3. Commodity Futures Trading Commission data on Friday showed speculators cut short euro positions sharply in the week to June 15, a period in which the euro rose 3% against the dollar.

GBP:  

1. Sterling strengthened against the dollar mainly due to better UK data, improved risk tolerance and broad dollar weakness.
2. Data showing Britain's budget deficit came in lower than expected in May had given sterling a helping hand.
3. Separately, lending to UK firms contracted at a slower pace in April and major banks approved mortgages in May, according to figures from the Bank of England which suggested credit conditions are easing somewhat.

JPY:  

1. The Japanese yen broke below 91 last week, after about 2 weeks being trapped in the 91-92 range. JPY closed around 90.75-80 levels but saw a low of 90.44 on Friday.
2. The dollar fell against the yen after U.S. data showed a decline in the Philadelphia Federal Reserve's mid-Atlantic manufacturing index while there was a rise in first-time jobless claims.

Derivatives

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 ECONOMIC INDICATORS (21-06-2010/25-06-2010)