GBP/EUR 1.1835 (0.8445)
Markets lack direction as the US debt ceiling deadline draws closer. Despite talks of a possible deal to extend the debt ceiling to February 7th and re-open the government until mid-January little progress was actually made and tension remains in Washington. There does appear to be a curious optimism and markets are not reflecting the worst case scenario of a US default.
Equity markets in the US yesterday and Asia overnight were in the red, but not the sort of fear related selling one might expect to see. The USD has remained range bound, the greenback is still under pressure but again we are not seeing out and out USD buying against emerging market currencies (fear related trade), nor are we seeing the USD suffer inadvertently against its liquid counterparts like GBP, EUR (safe refuge from USD).
We have to point out that even if we see a 25th hour reprieve, the US is not out of the woods. The “can” may well get kicked down the road but the costs of the Government shut-down is unknown as of yet, estimates suggest approx .15 off GDP per week, the impact on Jobs and growth will likely see any possible taper now pushed back into 2014.
This lead us to a larger macro theme we’d expect to see gather pace next year. Over the last 5 years, since the financial crisis began there has been a campaign by major economies to diversify away from the US as a reserve. The subprime crisis leading to bank recapitalisation led to a global slowdown, the current situation and risks to global growth once again make strong argument for diversification. The US is perhaps no longer the AAA rating it once was, ratings agency Fitch have put them on watch negative.
Outside the US the world is turning as usual, albeit with one cautious eye across the pond, the pound was a notable strong performer. A stronger CPI reading than expected boosted bets the UK would have to raise rates sooner than the BOE 2016 guideline, the BOE have been calling for the above target inflation reading to fall into 2014, if this does not happen the BOE may be forced to act.
We still take caution in this view, this month’s data has been less than supportive of the rapid growth some are predicting. Employment data today may give us some further colour, the claimant count is expected to drop by 25k, vs 32.6k last month, but the unemployment rate is expected to remain at 7.7%.
The Euro was generally lower across the board yesterday (aside from USD), taking into account our diversification from a USD reserve the Euro would be a prime candidate to benefit based on reserves and trade volume yet the fragile recovery in the region leaves investors tentative.
The German ZEW investor sentiment survey was stronger than expected at 52.8, with the Eurozone reading reaching the highest level in 4 years at 59.1. Eurozone inflation data on the cards today, a reading of 1.1% expected, still well below the 2% target. The longer this remains below the ECB’s target levels the more room they will have to be accommodative and with many expecting some form of bond purchases or LTRO 3 operation.