Morning Report: 16 December 2014

16th December 2014 By: Ranko Berich

GBP Sterling weakened yesterday, ahead of today’s important Financial Stability data from the Bank of England. The BoE released its latest Financial Stability Report this morning, together with the results of its latest stress tests of UK financial institutions. Three leading banks were found to be short of capital, including usual suspects RBS and Lloyds Banking Group as well as the Co-Operative Bank. RBS and Lloyds have outlined sufficient plans to correct their capital insufficiency, but the Co-Operative Bank will need to go back to the drawing board with its plans for capital raising. The actual Financial Stability Report itself contained a markedly more pessimistic view of the global economy, which was described as having weakened since the June 2014 Report. Domestic risks, including from the housing market, remained largely unchanged. In terms of the outlook for sterling, the Report is likely to have a limited impact as no major new risks were identified. Today’s release of the Consumer Price Index at 09:30 GMT will be far more important in terms of currency markets, after the sharp decline seen in the last reading of inflation. Bank of England Governor Mark Carney will present the Financial Stability Report at 09:00.

EUR The euro continues to show resilience as markets wait for the next round of important eurozone data. This morning has seen the release of Purchasing Managers Indices for Germany and France. French PMI figures for both Manufacturing and Services Industries remained negative, but within the realm of expectation. German Manufacturing PMI increased to 51.2, once again back above the 50 level that indicates optimism, after dipping to 49.5 previously. Figures for the eurozone as a whole will be released at 09:00 GMT. Later in the morning at10:00, research agency ZEW will release its Economic Sentiment indices for both Germany and the Eurozone as a whole. The German survey is particularly respected because of its large sample size of institutional investors and economists, and so will be closely watched. However, the euro appears to be numb to negative data at the moment, suggesting that further poor results have already been priced in to the euro and will not produce much movement.

USD The dollar had a fragmented day’s trading yesterday, strengthening against sterling while proving incredibly volatile against the euro. Developments against the Japanese yen affected the dollar against its other trading partners, as a yen rally caused a minor selloff in the dollar. The Empire State Manufacturing Index, which tracks manufacturing activity using a monthly survey, fell to -3.6, a surprise result that indicates contracting activity amongst the respondents. Later in the afternoon the latest Capacity Utilization Rate data was released, showing the economy was using up spare capacity at a rapid rate. This afternoon, data for Building Permits and Housing Starts will be released at 13:30 GMT.

CAD Yesterday’s trading saw yet another multi-year low for CAD against USD, and loonie’s decline is still showing little sign of stabilising. Today will see some fundamental data released in the form of Manufacturing Sales and Foreign Securities Purchases at 13:30 GMT, but it is difficult to see how even extremely optimistic data would be able to cause a significant reversal of CAD’s fortunes.

UK news

  • FT. Employers warn against curbs on unpaid interns: Curbs on unpaid internships will reduce the opportunities available to young people, the CBI, the UK’s biggest business lobby group, has said after Labour proposed a ban on placements of more than a month.
  • FT. Inflation has been higher for the poor, UK study finds: Inflation was much higher for the poorest families in Britain during the past decade than it was for the richest, according to the Office for National Statistics.
  • FT. Domestic demand lifts UK manufacturers: Order books at Britain’s manufacturers have hit a four-month high in an encouraging sign that domestic demand continues to boost the sector despite persistent weakness in the main export markets.
  • Reuters. Government seeks to lock in budget goals as election nears: Britain’s government promised on Monday to put its ambitious budget targets on a more formal footing, in a largely political move by Conservative Chancellor George Osborne to embarrass the opposition Labour party.