Sterling Sinks with Financials

* The dollar gained against most major currencies on Monday amid continuing concerns over the global economic downturn and the solvency of major financial institutions. The dollar index broke its important resistance level, indicating further gains for the USD. Global stock markets plunged with the S&P 500 closing just above the 700 level after AIG reported its largest loss. The yen gained from an oversold position on increased risk aversion. The global economic outlook continued to deteriorate with the eurozone PMI contracting at a record low and the US PMI staying close to last month’s low. US personal income and spending rose more than expected, but income was driven mostly by government income increases or adjustment while consumption may have been overstated by problems related to seasonally adjustments. US construction spending fell more than expected and nonresidential construction outpaced the fall in the residential sector. The euro fell after eurozone leaders failed to agree on an aid package for Eastern European countries. The EUR/USD is likely to test the important 1.24-1.25 support again. The Canadian dollar fell on contracting GDP and slumping oil prices. The Australia dollar fell ahead of the Reserve Bank of Australia’s interest-rate cut decision tonight. The RBA is likely to cut its key rate at least to 3.00%, to revive Australia’s slowing economy.

* The GBP/USD fell as UK house prices dropped the most since at least 2001 and UK’s HSBC said it was looking to raise £12.5 billion in a deeply discounted share sale. The Bank of England will probably cut its benchmark interest rate 50 basis points to a record low 0.50% on March 5 and announced steps to boost the money supply. The GBP/USD is in a downward sloping trading channel and likely to test the January 23 low of 1.3502. There are support at the 1.40 handle and resistance from the upper trading band in the 1.45 area. Meanwhile, the EUR/GBP rose but remained below the 0.90 resistance. The 0.90 is an important resistance as it is both the upper trading band in the downward sloping trading channel and the horizontal resistance. If the 0.90 resistance is broken, the recent downtrend is likely to reverse.

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Financial and Economic News and Comments

US & Canada

* US personal income unexpected gained 0.4% m/m and personal spending increased a more-than-expected 0.6% m/m in January, data from the Commerce Department showed. Personal income increased 1.9% y/y while personal spending declined 1.0% y/y. Disposable personal income rose 1.7% m/m in January, up 4.0% y/y. The overall PCE deflator (consumer inflation) increased 0.2% m/m in January, up 0.7% y/y. The core PCE deflator, which excludes food and energy, increased 0.1% m/m in January, up 1.6% y/y. After adjusting for inflation, real consumption increased 0.4% m/m in January but fell 1.6% y/y.

* The US ISM manufacturing index unexpectedly increased to 35.8 in February from 35.6 in January, indicating US manufacturing contracted for a 13th straight month, the Institute for Supply Management reported. The output components of the overall index were mixed. The production index increased to 36.3 from 32.1 and the supplier deliveries index rose to 46.7 from 45.3. The new orders index declined to 33.1 from 33.2 and the employment index fell to 26.1, a record low since 1948, from 29.9. The prices paid index was unchanged at 29.0.

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* US construction spending fell a more-than-expected 3.3% m/m in January after a downwardly revised 2.4% m/m decline in December, according to the Commerce Department. Private commercial projects fell 4.3% m/m, the most since January 1994.

* Canada’s Q4 2008 GDP contracted at the fastest rate since 1991, falling at a 3.4% q/q annualized rate to C$1.32 trillion ($1.03 trillion), following Q3’s downwardly revised 0.9% q/q growth, data from Statistics Canada showed. The GDP fell 1.0% m/m in December after a downwardly revised 0.7% m/m decline in November. The Bank of Canada will likely lower its key interest rate on Tuesday to a record low 0.50%, from the current 1.00%.

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Europe

* The eurozone consumer-price inflation rate in February unexpectedly rose to 1.2% y/y in February, staying near January’s 1.1% y/y lowest rate since July 1999.

* Eurozone manufacturing contracted at a record rate in February on collapsing export demand, with the eurozone PMI dropping to 33.5, final PMI data by Markit Economics showed, lower than both the initially reported 33.6 and January’s 34.4.

* Germany’s manufacturing remained in a deep contraction in February, with the German PMI at 32.1, according to final PMI data by Markit Economics, lower than the initially reported 32.2 but higher than January’s 32.0.

* UK manufacturing contracted for a 10th consecutive month in February, with the CIPS UK PMI falling more than expected to 34.7 from January’s 35.8, the Chartered Institute of Purchasing and Supply reported.

* UK house prices in January dropped the most since at least 2001, falling 10.0% y/y to £157,000 ($223,000), Hometrack Ltd. reported. House prices declined 0.8% m/m, led by Wales.

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* UK banks and building societies granted 31,000 mortgages in January, in line with December’s data and close to November’s decade-low of 27,000, the Bank of England said. Net consumer lending in January increased £1.1 billion ($1.6 billion), the weakest pace since 1993.

* Given deteriorating UK economic data, the Bank of England will likely cut its benchmark interest rate to a record low 0.50% on March 5, from the current 1.00%, to help counter an intensifying UK recession.

* Switzerland’s manufacturing activity continued to deteriorate in February, with the SVME PMI declining to a record low 32.6 from January’s 35.0, according to the Swiss Association of Purchasing and Materials Management.

Asia-Pacific

* The CLSA China PMI increased to a seasonally adjusted 45.1 in February, still below the 50 reading indicating China’s manufacturing contracted for a seventh month, following 42.2 in January, CLSA Asia-Pacific Markets reported.

* Japan’s vehicle sales dropped 32% to 218,212 vehicles in February, the lowest level in 35 years, the Japan Automobile Dealers Association said. Toyota’s sales fell 32%, Honda’s fell 21% and Nissan’s fell 35%.

* Southeast Asian leaders wrapped up the weekend ASEAN summit, opposing protectionism in battle against the economic downturn. They said they will coordinate policies to counter the global financial crisis.

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Source: Hans Nilsson

02.03.2009