Euro, risk assets rally, Sterling sinks in a replay of previous week action
04/Φεβ/2013 • Currency Updates•
2013 market themes remained intact last week. Risk assets rallied, with equities leading the way. The euro rose to fresh year highs, sterling continued to underperform against most major currencies, and the Yen sunk anew amid signs that the aggressive efforts of Japanese authorities to reflate are bearing fruit. Investors are focusing on the positive macroeconomic data worldwide and the extremely low level of rates, and are concluding (rightly, in our view) that risk assets are inexpensive compared to the negligible returns in cash or safe Government bonds.
There were little macroeconomic data of any importance last week. Nevertheless, sterling’s sell off against the euro continued apace, and once again the currency managed the once rare feat of closing the week down against both the common currency and the US dollar. In the absence of dramatic economic or policy developments to justify such a sharp drop, we think that investors are focusing on the next head of the Bank of England, Carney, who is leaving his current position as head of the Bank of Canada on a distinctly dovish note. Next week will provide some crucial insight on Carney’s mindset, as he is due to testify in front of the Treasury Select Committee. The sell-off in sterling has been so sharp, and trader positioning is getting so stretched against sterling, that even a neutral testimony may be enough to provide some support to the currency.
There was mixed news out of Europe last week. While the European Commission’s economic sentiment indices confirmed the moderate improvement seen in the PMIs, the bank lending survey surprised observers, showing further tightening in lending standards and continued contraction in the volume of credit available to households and corporations. Investors in the eurozone are still focusing on the positive, and the common currency rallied again against most major world currencies, particularly against the dollar, sterling, and most of all, against the yen.
Two big macroeconomic releases dominated the week in the United States: GDP growth and employment. The first reading of fourth-quarter growth for 2012 showed an unexpected contraction of -0.1% saar. However, the contraction was entirely due to an abnormal drop in Federal defense expenditures, and a decrease in inventories, both of which are expected to bounce back in the next quarter. Consumer demand grew by 2.2% and business investment by 8.4% saar, so the two key pillars of the economic recovery are not sputtering. The payroll report brought further confirmation that the recovery is maintaining its modest pace. 157,000 jobs were created on net in January, and the previous months saw generous upward revisions. Overall, the data are consistent with our call of growth in the 2.5-3% range in the US for 2013.