Newsletter Issue 19 July 2010

Economic Overview

Key notes from Last Week

The week ended with investors pulling back again from risk positions but it has been a week where there has been some important progress made in eliminating some of the big uncertainties hanging over the markets.

• The improvements range from a list of EC peripherals having successful bond auctions to BP having success in capping the Gulf of Mexico well. While the markets will still have to wait for the results of the EC bank stress test, there are a bit more confidence that the process will in fact be testing and we know that the results will be released shortly after 1600 GMT on Friday, July 23. Some of the regulatory uncertainties have also been addressed. The US financial reforms bill has been concluded. The VIX, a measure of risk aversion, reflects the risk retreat. It closed last week at 24.98 and headed for a close this week near the 27.40 level after a high on Friday of 28.16 (well off this year’s high of 48.20 on May 21 and low of 15.23 on April 12.
• On the economic data front, last weeks data dampened concerns of a global double-dip but weaker than expected releases out of China and the US added confirmation that the global recovery is losing momentum. Some of Asia’s glow was dampened by China’s Q2 GDP coming in up 10.3% against 10.5% after 11.9% in Q1. China’s June retail sales and industrial production data also suggested the economy was slowing and inflation pressures were also a bit softer than expected. There were no signs however that the China economy is slowing sharply and the moderation is just what the Chinese authorities wanted to see -- reducing the risk of excessive tightening. The US data were also broadly weaker - June retail sales, PPI and CPI, consumer sentiment and even the FOMC talking of the downside risks to growth. In Europe, there was limited EC data but the positive step on the bank stress tests and peripheral bond auctions improved market sentiment. UK June employment was better than expected, the June claimant rate slipping to 4.5% and June core CPI rose to 3.1% yoy from 2.9% in May.

Regional Markets

Iran is considering switching payments for its crude oil exports to Europe to the UAE dirham currency instead of the euro, the International Oil Daily industry newsletter reported. The newsletter, a copy of which was received by Reuters on Friday, said the move looked like an attempt to blunt the impact of financial sanctions soon to be adopted by the European Union.

Forex

EUR:  

1. The euro retreated after touching a two-month high against a broadly weaker dollar on Friday. Earlier, bolstering the European single currency was the recent rise in euro-priced bank-to-bank lending rates that picked up pace on Friday, fueled by a sharp drop in spare European Central Bank cash in money markets.
2. The euro has risen more than 9% from a four-year low of $1.1875 hit on June 7 after smooth government debt auctions in Greece, Portugal and Spain eased concerns about the euro zone's sovereign debt problems.
3. Stress tests being conducted in the European Union will show that all the major European Banks have sufficient capital, the head of the International Monetary Fund, Dominique Strauss-Kahn, said on Friday, further erasing concerns about fiscal problems in the euro zone. Results of the stress test will be published on July 23.

GBP:  

1. Sterling fell on Friday, hitting its lowest level against the euro Since July 1 as rising European money market rates and higher equities stoked demand for the euro.
2. The pound's losses versus the euro helped to pull it away from a 2 1/2-month high hit against the dollar on Thursday, but losses were limited after the UK currency closed decisively above a key technical level on Thursday.
3. Analysts said sterling's slide versus the dollar, which clips a three-day winning streak, suggested that investors are taking a breather from the pound's dramatic rise since mid-May as speculators unwind extreme short positions in the currency.

JPY:  

1. The return of risk aversion helped the Japanese yen end the week up 2.2% against the dollar. It closed last week at 88.62 and saw a high of 89.16 on Monday and closed on Friday at 86.55-60 (week’s low 86.27).
2. A private survey showing U.S. consumer sentiment weakened in early July to an 11-month low added to negative sentiment on the greenback and drove the dollar to a seven-month low against the yen.

Derivatives
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 ECONOMIC INDICATORS (19-Jul-2010/23-Jul-2010)