Another week of Punishment for Sterling
March 3rd, 2010
Upward revision to fourth quarter economic data does sterling no favours. Germany and France consider a bailout for Greece but there are no details yet.
A two-day honeymoon took sterling from €1.1350 to almost €1.1450 before it set off south. Thursday and Friday were a one-way street that took it down to €1.11 in time for London’s opening this morning.
Robert Stheeman, the chap responsible for issuing UK government bonds, managed an upbeat tone when he addressed a conference in London. He said that ‘politicians of all colours are taking the [public sector debt] situation very seriously indeed. Investors derive a lot of comfort that there is agreement across the spectrum that the deficit needs to be brought under control.’ Mr Stheeman also suggested that a hung parliament might be ‘less disruptive’ than assumed. Unfortunately the market did not share his optimism and sterling spend most of the week on the slide.
The rot started, as it so often does these days, with cautious words from Bank of England Governor Mervyn King to parliament’s Treasury Committee. He did not go out of his way to talk sterling lower but, by refusing to rule out the possibility of further quantitative easing, made it sound as though the Bank’s printing press is ticking over and ready for more action. The governor’s comments coincided with news that mortgage approvals had dropped sharply in January with the end of the stamp duty holiday.
Sterling spent the rest of the week rolling from one punch after another as investors lightened their holdings. A sharp fall in business investment at the end of last year saw investment down by 24.1% for the full year. Consumer confidence improved by three points but at -14 it still had a minus sign in front of it.
Nationwide reported a -1.0% monthly fall in house prices after nine months of improvement. Britain’s overall economic performance in the fourth quarter of 2009 was revised to show growth of +0.3% instead of the +0.1% previously reported but third quarter shrinkage was also revised, from -0.2% to -0.3%. Government spending in the fourth quarter was much higher than expected.
Investors did not just ignore one part of the euro zone economic story, they ignored the lot. Industrial new orders grew in December by +0.8%, less than a third of the pace seen in November but the cumulative effect of several months of improvement took the annual increase to +9.5%.
Confidence figures from Brussels had little to say; consumer and economic confidence were very slightly softer while industrial confidence edged higher. Euroland inflation was roughly in line with expectations. Prices fell by -0.8% in January but were still +1.0% higher than a year ago.
Greece was again the main story for the euro. Even though no solid plans emerged last week, stories at the weekend suggested the emergence of a workable solution that would see the better-heeled euro zone members buying Greek government bonds. EU Economic Affairs Commissioner Olli Rehn is in Athens today, apparently to negotiate a deal whereby Greece would get the support it needs in return for taking painful decisions to reduce its budget deficit.
Although Germany’s Chancellor Merkel still publicly maintains that Greece’s salvation lies in Athens, not Berlin, she and other European leaders are not looking for a Pyrrhic victory that would scupper the single currency.
The six weeks that sterling spent between €1.13 and €1.16 have been consigned to history With opinion polls closing the gap between Labour and Conservative to almost nothing investors fear that even after the general election Britain’s government will be paralysed by indecision, unable or unwilling to tackle the budget gap.
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