Risk Aversion Returns
Risk Aversion trading takes over again in the Far East as uncertainty over the seriousness of the ‘swine-flu’ proves the driver for market traders. Official comment puts the death toll so far in Mexico at 103 and although there have been no fatalities from the disease in the US, there have been reported cases in several large cities including at a high school in New York City. This really is an example of ‘watch this space’ and the market will be conscious of any adverse developments.
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Whilst the flu story is very unpredictable, the rest of the market has a more routine ring to it. The US Treasury get back on their cash raising wagon following last week’s break in funding and are hoping to raise $ 101 billion over the next 3 days via the issue of 2, 5 and 7 year Treasury notes.
The EU have a less onerous agenda, with Euro 19 billion of bonds on offer and the UK, via the BoE buyback, seeing a net negative £ 2.5 billion. Sterling looks a tad under pressure this morning despite the ratings agencies announcing that they are not planning to review the UK’s AAA sovereign status. It certainly looks as though the market is still concerned about the country’s enormous budget deficits and growth data and is shying away from Sterling at the moment. The IMF questioning Alistair Darling’s projected growth and activity numbers used in his budget calculations is not going to help.
G20 meeting in Washington, which the world had hoped would ratify the new era of co-operation and joint action, was a bit of a disappointment with disagreement between the US and Europe and the Far East and the US raising the possibility that the new IMF funding programme might not go ahead as easily as had been hoped. The meeting broke up with little progress having been achieved with just the now obligatory statement about China freeing up their currency market to show for a weekend of jaw-boning.
As for economic news, this week sees some important releases from the US especially. Given that the recent return of risk appetite has been driven by a move towards more benign economic statistics, the market will hope for no surprises. US GDP and ISM figures look the most interesting. I would expect moves in forex rates to be dominated by equity moves, again, as well as on news of the spread or containment of the swine-flu epidemic. Lots of big US Corporates reporting this week so Wall Street the catalyst.
So far today we have seen the Hometrack housing survey from the UK (down 0.3% but maintaining the better trend) and the May German consumer climate survey, a forward looking indicator, which came in better than expected along with an upward revision to April’s number. No reaction from exchange rates to either release.
Gold is the big mover since last week with the price of the precious metal rising $20/oz following news that China’s state holdings have been raised by approximately 450 tonnes (or by +75%) since 2003.China has been rumoured to have been buying gold for a while now but this number is much higher than had been thought. Given that their percentage of foreign reserves held in gold is still only about 1.5% against a global average of nearer 10%, we can expect to see this buying continued with a corresponding move up in price. The estimates for gold to hit $2,000/oz by year end might not be so far from the actual that they once appeared with a softer Dollar as a result a viable prediction.
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