Brave New World

Market Commentary 05/03/2009

EURUSD -Bearish sub 1.2590. Targeting 1.2410- otherwise, break above 1.2660

EURGBP Bullish above 0.8910, targeting 0.9010- otherwise, break below 0.8860

GBPUSD Bearish targeting 1.360, then 1,3500- otherwise, break above 1.4250

It is testament to the level of gloom that has descended on the market in recent days that the the much anticipated and historic rate decisions were overshadowed by a return to gloom after yesterday’s brief respite. Comments from Wen Jiabao at the annual NPD overnight, in which he expected the economy to reach 8% growth in 2009, appeared to dash hopes for any additional stimulus- rumours of which circulated the market yesterday, causing risk appetite to improve. Equity markets have resumed their downward path, with European bourses declining over 3%. Markets in the US also continued downwards, by around 3% in NY midday trading. Oil declined on the back of the news from China (with Brent crude down 2.3%) and gold is rallying, although only by less than 1% after pairing back earlier gains.

Economic data from Europe has added fuel to the fire. German retail sales plunged -0.6% in January while the market was looking for a small increase. French unemployment jumped to 8.2% in 4Q from 7.6% in the previous quarter and much worse than the consensus forecast. If that wasn’t enough, the 4Q eurozone GDP report showed a huge downward revision to household consumption to -0.9% from a previously reported -0.2% and down from +0.1% in 3Q. The cut in rates by the ECB of 50bps to 1.5% was in line with expectations and so caused little market movement, after initial volatility. EURUSD is trading around the 1.2550 level, following a declining from 1.2665 to 1.2480. The markets have responded positively to comments from Trichet following the rate cut, that further cuts had not been ruled out. The ECB has changed its tone to a more proactive, if still cautious, monetary authority. EURGBP had a 100 pips swing following the ECB and BOE announcements but has settled to around the pre-announcement levels of just below 0.8900.

As expected, the BOE halved interest rates to a new record low of 0.50%, in line with market expectation. In a widely anticipated move it also announced the start of a a program of quantitative easing- a total of GBP75bn to be injected into the economy, by way of buying corporate bonds, medium and long-term government paper in an attempt to support the credit markets. The fact that it stated that this would be conducted over the next few months, and that it would target longer dated paper, led to a sell-off in sterling as investors had hoped for a figure closer to GBP100bn. Another announcement, another opportunity missed to provide shock and awe to the markets; something the UK looks like it sorely needs, given the data coming out of the country. According to the latest Halifax survey home prices plunged a steeper than expected -2.3% in the month of February, taking the three month rate to an awful -17.7%. Cable’s hourly trendline by 1.4010 looks like the next crucial support area and below likely revisits this week’s lows by 1.3950 next.