Daily Financial Market Outlook

Daily Forex Fundamentals | Written by Lloyds TSB | Dec 12 08 08:14 GMT |

Overview & economic commentary The slide in sterling against the euro took a turn for the worse overnight, with a collapse in confidence squeezing €/£ above 0.90 (£/€ below 1.12. The 8% surge since November 28th is very tricky to rationalise on a fundamental basis right now and is more than anything driven by yield differentials, momentum and illiquid trading conditions. How far the currency pair will extend is hard to predict, but with both the BoE and ECB engaged in cutting interest rates, the least we can say is that volatility is likely to stay high as markets consider which of the two economies will be the first to emerge from recession. Euro zone industrial output data for October is due this morning and may show a fifth contraction in six months, led by a 2.1% m/m drop in Germany. Sharp falls in new industry orders suggest output is likely to stay weak near term. In the US, a contraction in real personal spending has already emerged so we imagine that most of the bad news should be priced in when retail sales data for November are released this afternoon. We forecast a drop of 1.5% m/m for the headline number and a 1.5% decrease ex-autos. The University of Michigan survey may show a stabilisation in consumer confidence in December after the fall to a 28- year low in November. Producer prices are forecast to have dropped 1.8% m/m in November, bringing evidence of an easing in pipeline inflation. In Asia, Japanese October industrial output data was confirmed at -7.1% and consumer confidence dropped in November to 28.7. Currency commentary Equities are set for a lower start today after the US Senate rejected the car bailout plan. S&P futures are down 20.7. This helped $/Y to break below 90.0. The move in €/£ up to a high of 0.8909 stalled and we saw profit taking by participants in Asia. With euro zone industrial output data possibly surprising to the downside this morning, on could make a case for a pullback towards 0.88. By any measure the spike this week may be overdone and suggests we should see some retracement followed by a consolidation. However, with fx volumes fairly thin, a late Friday squeeze cannot be ruled out, setting up a test of 0.90. US 2yr yield slumped to 0.68% o/n as flight-toquality flows resume on the failed car rescue package. US retail sales and consumer confidence are released this afternoon but may not be of much relevance to the market considering the amount of bad news already priced in. The rally in EM currencies fizzled out o/n as stocks wilt, but the Brazilian real, Korean won and Turkish Lira should still end the week up Major data and events today EU-15 industrial production (sa) (10:00) Sep -1.6% Y-O-Y -2.4% Oct (f'cast) -0.8% Y-O-Y -3.4% Median -1.0% Range -2.6%:+0.1% US Producer prices (sa, prov) (13:30) Oct -2.8% Y-O-Y +5.2% Nov (f'cast) -1.8% Y-O-Y +0.9% Median -1.8% Range -3.3%:-0.3% US PPI core (sa, prov) (13:30) Oct +0.4% Y-O-Y +4.4% Nov (f'cast) -0.1% Y-O-Y +4.2% Median +0.1% Range -0.3%:+0.3% US Retail sales (advance) (13:30) Oct -2.8% Y-O-Y -4.1% Nov (f'cast) -1.3% Y-O-Y -5.8% Median -1.8% Range -2.5%:-0.7% US Retail sales, ex-autos (13:30) Oct -2.2% Y-O-Y +0.9% Nov (f'cast) -1.5% Y-O-Y -2.0% Median -1.8% Range -2.7%:-0.4% University of Michigan confidence (prel) (15:00) Nov 55.3 Dec (f'cast) 55.0 Median 55.0 Range 52.0:59.0 Japan Industrial output (04:30) (final) Oct (prel) Y-O-Y -7.1% Oct (final) Y-O-Y -7.1% ECB member Mersch speaks (08:00) Chart of the day: US consumer confidence sank to a 28- year low last month as unemployment takes its toll Lloyds TSB Bank http://www.lloydstsbfinancialmarkets.com Disclaimer: Any documentation, reports, correspondence or other material or information in whatever form be it electronic, textual or otherwise is based on sources believed to be reliable, however neither the Bank nor its directors, officers or employees warrant accuracy, completeness or otherwise, or accept responsibility for any error, omission or other inaccuracy, or for any consequences arising from any reliance upon such information. 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