Brave New World

Market Report 13/02/2009

The overnight session in Asia was a relatively subdued affair for the FX market, with the EUR and GBP strengthening as a result of short covering ahead of this weekend’s G7 meeting. The Euro’s rally, which led to a high of 1.2940 against the USD promptly ended with dire economic GDP figures from the Eurozone. Overall, Eurozone GDP declined by 1.5% q/q compared with the market expectation of -1.3%. France, which is still not technically in recession as it recorded growth in Q3, experienced a 1.2% drop in Q4; the worst quarterly drop since 1974. Italy’s GDP contracted by 1.8% in the same period; its worst quarterly fall since records began in 1980 (that doesn’t seem right, I must check that). Both these figures were in line with expectations. It was Germany’s contraction’s was particularly unexpected, with a 2.1% contraction versus a market expectation of -1.8%- the worst figure since 1990. GBP had earlier benefitted from the bleak news in the Eurozone, gaining sharply against the EUR, with EURGBP trading down to 0.8830, and the USD, with Cable rallying 250bps up to just above 1.4600. Given that Sterling has been seen as a bellweather for risk appetite, the rally could be assumed to represent optimism that the upcoming G7 meeting in Rome would yield greater coordinated action to resolve the banking crisis. My midafternoong in Europe Cable had lost 200 pips to trade at around 1.44 following a profits warning from Lloyds which saw UK bank share prices plummet and comments from PM Brown that the fall in sterling had made Britain more competitive. In the US, the Obama administration is planning to announce a program to help subsidise mortgages, according to Reuters. The plan will seek to help homeowners before they fall into arrears on their loans. The US equity market spiked up on the back of the news, at the end of New York trading. However, there is every reason to suspect that such an announcement will add to the deterioration of investor confidence, especially as markets have been scathing in the lack of detail hitherto offered by the White House on resolving the banking crisis. Expect the the stallwarts of risk aversion, the USD and JPY, to strengthen next week. GBP should test the 1.40 level against the USD; the  EUR  1.27.