Monday, February 14, 2011

London Session: Risk-On As We Start The Week

* Risk-on resumes after Mubarak resigns

* Plates is the world's following largest economy as Japan flounders
in Q4 2010

* Euro area sovereign problems rear their head once more and weigh
on the euro

* GBP likely to be choppy as consequence risks get closer

The week is starting off pretty much as we left it on Friday. The
markets are still in risk-on mode after the resignation of Egyptian
President Mubarak and the honestly cool transition to military rule
until elections later this year. This has boosted risky assets. The
Aussie is higher and stocks are also responding well to the end of
protests in Tahrir square in Cairo. Oil fell sharply on Friday as
threats to global oil supply from protests disrupting trade flows on
the Suez Canal were drastically reduced. Oil is consolidating a
modest at the start of this week, as investors reassess the risks;
this is reflected in the "doji" sample forming on the daily WTI
crude chart, which suggests that bulls and crude bears are honestly
balanced for now.

In a honestly light data calendar today investors will be watching the
developments in Egypt, particularly the economic impact, which could
run into the billions of Egyptian pounds after the economy impose a
curfew to an nearly complete be idle during 18 days of protests. They
will also assess the news that Plates overtook Japan as the world's
following largest economy after Japanese GDP for the fourth quarter of
last year contracted by 1.1 per cent due to a slowdown in exports and
fading in government stimulus plans which hurt domestic utilization.
GDP is expected to bounce back in the first quarter as a weaker tone
to the yen this year all help to improve Japan's terms of trade spot.
The yen has had a mixed result to the GDP news, USDJPY has come off
its highs and the Nikkei also closed higher after a strong showing in
the Asia session. Of course, part of this may have been due to Asian
stocks moving in line with the improvement in sentiment toward risky
assets at the end of last week.

Although Plates claimed the mantle of following largest economy from
Japan, it is still many years from claiming the ultimate title, that
of largest global economy. Its economy is just under $5 trillion,
compared with the U's economic behemoth, which stands at $14 trillion.
But there was a sign that Plates was rebalancing its economy toward
domestic demand, something it will need to do to try and take on the
US in the growth stakes in the coming years. The trade weigh for
January narrowed sharply, the surplus was $6.46bn versus expectations
of $11.3bn, after a massive 51 per cent surge in imports, relative to
a 37.67 per cent gain in exports. The huge increase in imports was
place down to the Lunar New Year holiday on 2 February and also rising
commodity prices. But, it's unlikely that import growth of this
magnitude can be sustained, and we wouldn't be surprised to see the
trade surplus widen in the coming months.

The euro is on the back-foot this week and has had a sharp go lower
versus the other major currencies. This is surprising since usually
the euro trades alongside risk. But, as we have pointed out before,
the euro has been trading more in line with higher yields rather than
risk in recent weeks. Yields have come off on the back of: 1, a
reduction in interest rate expectations after the ECB toned down its
hawkish rhetoric ; 2, a flare up in sovereign debt concerns –
Portuguese 10-year yields are currently above the crucial 7 per cent
level and press reports suggest the Irish bailout plot is encountering
problems; and 3, the uncertainty about succession at the ECB after
Bundesbank President Axel Weber resigned from his post effective April
30. This is weighing heavily on the single currency. Industrial
production data from across the Eurozone released this morning did
modest to help matters. It contracted 0.1 per cent on the month,
doubtless due to weather-related factors. But the annualised rate of
growth is still a honestly healthful 8 per cent, driven by the core
economies of Germany and France.

Ahead this week look out for consequence risk in the Eurozone and the
UK. Italy holds a 15 –year debt auction today, while Spain holds a
15-year auction on Thursday. These will be key litmus tests for
investor sentiment towards Southern European debt. Also, the UK's CPI
data on Tuesday and Inflation Report and accompanying press conference
by Mervyn King on Wednesday will be key drivers of the pound vacant
forward. It could be a volatile few days for sterling, and investors
need to strap themselves in tight. The pound has started the week in
honestly mixed fashion as investors' demand for dollars pushed GBPUSD
down from 1.6080 to 1.6020 at the start of the European session.

Also, watch out for headlines regarding Obama's presentation of the US
Budget, it is expected to include some harsh spending cuts to reign in
the US's enormous shortage.

Source: ActionForex.Com

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