Economic and market briefing: news update
0It should come as no surprise that the US$ and the Japanese Yen have continued to grind stronger, with one European bank announcing overnight a large share offer discount, which sparked market concerns of funding stress. Asian equities are mixed with Sensex and Hang Seng up 0.5% and 0.4%, respectively, while Nikkei down 0.6%.
So this is not the best climate for Euroland bond auctions but the Republic of France auctions up to €8bn in 10-, 12-, 23-, and 29-year bonds today.
Market participants continue to monitor demand at primary auctions as a potential catalyst for renewed market stress and it is against this backcloth that the ECB, in its role as lender of last resort to peripheral financial institutions, is funding the periphery’s massive balance of payments imbalances.
The balance of payments in the periphery has a massive hole as those countries continue to run large current account deficits while at the same time enduring massive private sector capital account withdrawals. Typically, a current account deficit would be offset by a corresponding capital account surplus, and any mismatch would show up in the currency and in capital market adjustments. However, this is not now the case in Europe. In Europe’s case the ECB is standing in the middle. As the core banks cut off those in the periphery, the ECB is offsetting the balance of payments pressures by printing money at a below-market rate and lending it to peripheral banks, accepting questionable collateral in return. As long as this arrangement continues, the imbalances are likely to persist and the ECB’s collateral risks will continue to grow.
As for data today, for the UK we have the Services Purchasing Managers’ Institute (PMI) survey. This has been broadly flat over the past few months and is unlikely to break the recent range in December. Sterling has continued to benefit from the € stress, as reserve managers have stepped up their diversification into sterling during periods of elevated peripheral concern. However, significant deterioration in Euroland would likely stall the UK recovery and prompt further easing from the Bank of England, which should limit scope for EURGBP to revisit its mid 2010 lows below 0.82.
Over in the US this afternoon, we’re due the ADP employment report, which will provide a preview of Friday’s employment data. Consensus is looking for 178,000 for the ADP report, which would be roughly in line with 170,000 for Friday’s private payrolls gain. The non-manufacturing ISM is also released and is expected to rise off November’s two-year low of 52 to 53, although this is expected to have been helped by seasonal factors. Jobless claims will also be a focus, albeit that the holiday period complicates interpretation of this data. That said, stronger US data should be generally supportive of assets geared to US growth. As wrinkle on this rule of thumb, markets having already reduced US recession risk pricing considerably in recent weeks, so the bar has been raised considerably for US data to affect risk sentiment positively.
As a final observation, IMF data released on December 30th, reveal that FX reserve accumulation slowed significantly in Q3 as risk appetite deteriorated, with global central banks added approximately $190bn of reserves, significantly less compared to the previous steady pace of FX reserve increases of about $300bn per quarter. As Stuart Freeman pointed out, foreigners’ net gilt purchases in November as reported yesterday were the highest since September 2008 – evidence that the latest gilt surge has been driven by ‘safe-haven’ buying rather than domestic buying and making the market fragile.
James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla
