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Yesterday was an eventful day for the Euro as it made significant gains versus both Sterling and the Dollar. The British pound hit a 3 week low against the Euro as the UK Manufacturing PMI came in well below expectations at 54.3 in August following a reading of 56.9 in July. Nationwide house price data out overnight was also disappointing so we may see Sterling remaining on the back foot today. Robust economic readings in both China and Australia overnight, spurred on demand for higher-yielding assets prompting the Dollar and Japanese Yen to fall against most of their major counterparts. Australian GDP surprised strongly on the upside at 1.2% q/q, against the anticipated 0.9% q/q. This coupled with better than expected manufacturing numbers in China have led the market to the risk on trade.
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The highlight overnight was the release of the minutes from the August 10th Federal Reserve Open Market Committee meeting. Some Federal Reserve officials were concerned that a decision to keep securities holdings unchanged would inadvertently signal an intention to resume large-scale asset purchases. Also, a few policy makers said the economic effects of the decision “would be quite small,” but at the same time, some officials saw “increased downside risks to the outlook for both growth and inflation” and voiced concern that further shocks would cause “significant slowing in growth”. The debate shows the challenge Fed Chairman Ben S. Bernanke may face in achieving consensus for any additional monetary stimulus to reverse a slowdown in growth and reduce joblessness more quickly. In a speech last week, Bernanke said “Policy makers haven’t agreed on specific criteria or triggers for further action”.
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Last Friday Fed Chairman Ben Bernanke suggested that the bank will do all it can to maintain the US economic recovery and gave an overview of the steps the Fed can take if growth continues to slow. Mr Bernanke said the Fed can provide additional monetary accommodation through unconventional measures if needed, especially if the economic situation continues to deteriorate. The mention of another round of QE had already been priced into the Dollar and so the speech had little impact, but the implications for the Fed stance moving forward will keep the Dollar on the back foot, especially with GDP growth also downgraded to 1.6% on Friday afternoon. This week’s data releases are focused on the US, with the closely watched non-farm payrolls figure out on Friday and the ISM manufacturing index published on Wednesday. The unemployment data is forecast to show a loss of around 100K jobs, but taking into account the recent news flow, the number may be significant lower.
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Global markets are in the doldrums and with decreased trading volumes and a lack of positive data there has been little to prevent a downward path this week. The Dow is down 2.23% on the week and just over 6% on the month, slipping below the critical 10,000 level (closing yesterday at 9,985). S&P and Nasdaq have followed suit heading into the end of the month 6.7% and 6% down on the month. In the UK the FTSE clawed back from the 6 week low of 5070 seen on Wednesday but is still 3.50% down on the month.  In Asia, the Nikkei and Hang Seng haven’t bucked the global trend also down 5.5% and 2% on the month.
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An unexpected boost in German IFO business sentiment gave the Euro a lift yesterday. The data showed sentiment at a three year high, hitting 106.7 versus a forecast level of 105.5 and reaffirming the positive data flow from Germany over the past month. However, Irish woes continued with Standard & Poor’s, the ratings agency, downgrading their debt to AA- with a negative outlook. The huge cost of supporting the Irish banking system will push debt towards 113 per cent of GDP according the S&P estimates, well above the Eurozone average putting increasing demands on the Celtic tiger’s public finances and creating serious headwinds for economic growth. Irish ministers were understandably furious, but the fear is the austerity measures designed to reduce the government budget deficit may make the job harder because of increasing unemployment and depressing tax revenues. This fear, applicable to the other indebted Eurozone nations, is once again hanging over the Euro and is allowing Sterling and the Dollar to regain lost ground against it.
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Sales of previously owned US homes dropped more than expected in July to their lowest pace in 15 years implying further loss of momentum in the States economic recovery.  The record drop of 27.2% from June equates to an annual rate of 3.83 million units which is the lowest level since May 1995 and June’s sales pace was revised down to a 5.26million-unit pace.  Markets had been anticipating a tumble of around 12% and so were shocked with the magnitude of this figure.
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