On the first day of the new week it was once again the oil price that was dominating the headspace of investors, with WTI crude climbing another $2 to $106.45 a barrel and Brent crude up to $118 at one stage (although overnight it has fallen all the way back to $113.55). Supply concerns remain the main driver of the higher oil price, amidst civil war in Libya and rising protests in Iran, Bahrain, Yemen and Oman. Most worrying is in Saudi Arabia, the world’s largest oil producer, where local websites have been calling for a ‘day of rage’ on Friday.
Guest post by FxPro
What is particularly striking about the surge in the oil price both this year and in the final quarter of last year is the muted response not just from foreign exchange markets but other asset classes as well. For the year-to-date, the major bourses are generally up by 3-5% after a strong end to 2010, and amongst the major currencies there has been little meaningful change apart from the dollar being a little weaker. Indeed, given the jump in the oil price, one might have expected the dollar to have fallen further. Certainly, traders and hedge funds are very much positioned short dollars, as confirmed by the most recent CFTC data. Against the backdrop of significantly tighter financial conditions in developed and developing economies, and the considerable potential for greater volatility in bonds and equities, we are not convinced that being short dollars would be successful if there was a sudden impulse to avoid risk.
Commentary
Rising inflation expectations in the UK. A popular refrain amongst the doves on the Bank of England’s Monetary Policy Committee is that inflation expectations remain little changed in response to the sharp rise in actual inflation over the past year. This claim is a little disingenuous. Firstly, manufacturing firms are very much reflecting both a desire to and success in raising prices. According to a survey conducted by the Engineering Employers Federation last month, a net 39% of companies expect to raise prices in coming months, up from a net 16% back in November. Secondly, at the end of January, some 90% of those surveyed by GfK expected inflation to rise in the next year, very close to a record high. And finally, the UK break-even inflation rate (the differential between10yr conventional gilt yields and the yield on linkers of equivalent maturity) has widened to 325bp, the highest since September 2008. To be fair, although inflation expectations have definitely moved higher, it would be exaggeration to declare that it was a significant movement, or to suggest that it was permanent move.
Portugal remains in the doghouse. As European policy-makers edge uncertainly towards key summits at the end of this week and then again two weeks later, it was the PIGS that were back in the spotlight yesterday. It was as though traders and hedge fund managers had decided to ratchet up the pressure, amidst signs of widespread disagreement over the best way forward. Investors increasingly have a sense that nothing of real substance will emerge from these exhaustive talks over coming weeks. PIGS bonds set plenty of new records yesterday – both the Portuguese and Irish 10yr yields registered new lifetime highs while Greek CDS rose to new record highs.
Greece downgrade by Moody’s ignored by euro. Moody’s decision to chop Greece’s credit rating by three notches to B1 from Baa1 was almost completely ignored by the forex market. Citing (justified) concerns about tax-revenue collection and the considerable risk of disappointment on its promised fiscal reforms, Moody’s contend that the chances of default have risen substantially. The Greek government is set to announce measures amounting to 8% of GDP by the end of the month in order to attempt to get the deficit down to 3% by 2015 as agreed in last year’s bailout.
Ireland’s sale of bank loans will be significantly delayed. The new Irish Government risks the wrath of European officials after the news over the weekend that the sale of dodgy loans in Ireland’s troubled banks will likely to be significantly delayed. To any person with even half an idea of how involved these loan disposals can be, this announcement is not remotely a surprise. In addition, rapid disposal of a loan portfolio is sure to dampen the price, a realisation now obviously being made. Not surprisingly, the ECB had been keen to get these Irish banks to offload their loans as quickly as possible, in order to reduce their dependence on emergency funding, already up to €140bn. Interestingly, the new government is considering asset sales as a way of lightening the fiscal load. It owns major stakes in regional airports, bus transport, ports and utilities.
Looking Ahead
Tuesday: UK: RICS house price survey, February (expect -33%, previous -31%); BRC Sales, February; FR: BOF Business Sentiment survey, February (previous 110); Trade balance, January (previous -€5.1bn); GER: Factory Orders, January (expect 2.5% MoM and 15.5% YoY, previous -3.4% and 19.7%); US: NFIB Small Business Optimism, February (previous 94.1); IBD/TIPP Economic Optimism, March (previous 94.1).
Wednesday: UK: Trade balance, January (previous – £4.83bn); GER: Industrial Production, January (expect 1.5% MoM and 11.1% YoY, previous -1.5% and 10.0%); US:MBA Mortgage Applications; Wholesale Inventories, January (expect 1.0% MoM, previous 1.0%).
Thursday: FR: Industrial Production, January (previous 0.3% MoM and 7.0% YoY); GER: Trade balance, January (previous €11.9bn); EC: ECB Monthly Report; IT: Industrial Production, January (previous 0.3% MoM and 5.4% YoY); UK: Industrial Production, January (previous 0.5% MoM and 3.6% YoY); MPC meeting (expect rates on hold at 0.5%); US: Initial Jobless Claims (previous 368K); Trade balance, January (expect -$41bn, previous -$40.6bn); Bloomberg Consumer Comfort; Monthly Budget Statement, February (expect -$235bn).
Friday: UK: NIESR GDP estimate, February (expect 0.5%); PPI Output Prices, February (previous 1.0% MoM and 4.8% YoY); GER: CPI, February f (expect 0.5% MoM and 2.2% YoY); CAN: Net change in employment, February (previous 69.2K); US: Retail Sales, February (expect 0.6%, previous 0.3%); Business Inventories, January (expect 0.7%, previous 0.8%).
Source: Bloomberg
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