Since the end of the US election, the US dollar index failed to make news highs despite the sharp drop in stocks. The weakness in currencies last week was in commodity currencies and the Yen. Indeed, equity markets sold off heavily during the week on worries that the US politicians would not be able to solve the fiscal cliff. The main game in the US remains the ongoing painfully slow negotiations between both parties while the end of the year is approaching quickly and investors continue their profit taking.
As European headlines took a backseat this week, the Euro remained resilient as European politicians continue to negotiate another Greek debt relief program and announced that they agreed to give Greece two more years to meet their budget deficit targets. The Euro range traded this week started Monday at a low of 1.2714, reaching a high of 1.2802 after the Greek decision however could not maintain gains to end the week at 1.2743
After starting the week on a positive note, The sterling pound dropped after Bank of England Mervin King mentioned that they had decided to freeze their main stimulus program due to the higher inflation in the UK. The pound ended the week at 1.5883.
US housing market: In a speech delivered on Thursday in Atlanta, Federal Reserve Chairman Ben Bernanke, said the improving housing market is “far from being out of the woods.” and “Although there are good reasons to be encouraged by the recent direction of the housing market, we should not be satisfied with the progress we have seen so far.” He also noted that tighter credit standards were an appropriate response to the peak in house prices and Americans remain worried over the labor market, housing prices, and the economy in general, which in turn is keeping potential homebuyers on the sideline.
Expect QE3 to continue in 2013: According to Federal Reserve Bank of San Francisco President John Williams, the Central Bank will continue its WE3 program well into 2013 even if the economic outlook improves, as employment growth remains fragile. Additionally, Richmond Fed president reiterated similar comments this week as he mentioned that the uncertainty over the US fiscal policy is holding back business investment and hiring, though he expects “meaningful progress” on budget issues now that the election is over.
Retail sales in the US hit: US Retail sales fell in October by the most since June, hurt by the effects of Hurricane Sandy. Retail sales dropped 0.3 percent last month, while economists had expected a smaller 0.1 percent decline. The data released also showed a weak consumer demand in a number of areas as retail segments, and auto dealers where sales sank 1.5 percent in October, marking the biggest drop in more than a year. Excluding the auto sector, retail sales were unchanged even though most segments reported a drop in business. If service stations were omitted, retail sales fell a sharper 0.5 percent in October.
Europe & UK
Greece’s fate: With Greece at the center of attention again this week, the European Finance ministers praised reforms taken by the country and gave them two more years to make budget cuts; a concession that is expected to require additional funding of nearly ¤33bn. A German newspaper reported that Germany’s finance minister Juncker implied that the troika report on Greece was largely “positive” in tone. However, no final decision has yet been made on the payout.
Merkel added on Thursday that she expected next week’s Eurogroup/ECOFIN meeting to decide on the next steps for Greece in terms of a disbursement and debt sustainability. Greece also issued on Thursday an additional ¤937m of one and three-month T-bills, bringing the proceeds from the past week’s auction to ¤5bn. Tensions however continue between Jean Claude Juncker of the EU and IMF president Lagarde on Greece’s debt-sustainability target, with Juncker saying that Greece should be given until 2022 to cut debt to 120 percent of GDP while Lagarde said that target should be by 2020.
Spain inflation: The Spanish annual inflation reached 3.5 percent in October, highest rate since May 2011. The increase was attributed to the increasing prices in education, personal care services, leisure and culture, food and soft drinks, many affected by the sales tax increase from 18 to 21 percent in September. If the November rate remains high, the government could face a shortfall of around ¤5bn more in order to maintain pensioners’ purchasing power.
German sentiment: German ZEW Survey, a gauge of the economic sentiment fell to -15.7 points in November, from -11.5 points registered in October. Analysts had expected an increase to -7 points, making investors worried that Germany is starting to feel the effect from the ongoing crisis.
Additionally, the country’s gross domestic product (GDP) rose 0.2 percent in the third quarter, beating economists’ estimates of 0.1 percent gain. The figure, however, is slightly lower than the 0.3 percent increase posted in the second quarter, which add to the concerns that the country’s activities has slowed down in the third quarter. The government also cut its growth forecast next year to 1 percent from 1.6 percent last month. Main reasons for the changes were the ongoing euro zone debt crisis and slowing growth in emerging economies in Asia and Latin America.
Bank of England: In its quarterly inflation report, the Bank of England lowered its growth forecast but raised its inflation outlook. The bank projected annual growth of around 2 percent in two years. It also indicated that inflation is likely to be around 1.8 percent in two years’ time, slightly above Augusts’ 1.7 percent forecast. Additionally, the Bank of England governor, Mervyn King stated that the UK faces an ‘unappealing combination’ of a subdued economic recovery and above-target inflation.
Asia
Japan election: Japan’s finance minister Koriki Jojima said it was up to the Bank of Japan to decide whether to implement unlimited monetary easing, as the opposition leader Shinzo Abe called for on Thursday. Meanwhile, Abe said in separate comments that a change to the BoJ law was a possibility in order to implement bold easing steps. Other news reports suggested that Abe was prepared to establish a foreign bond-buying fund composed of the Bank of Japan, the government and private investors. This move would be a significant step as it would translate in JPY weakness, and the market was currently pricing little chance of it happening.
On Friday, Japan’s government cut its economic forecasts for the fourth straight month in its monthly economic report. Japan’s economy ‘shows weakness recently due to the deceleration of the world economy,’ while exports to Asian and European economies will remain sluggish
Commodities
Global gold demand subdued: Global gold demand dropped 11 percent in the three months to September from record levels seen in the same period last year. Main reasons cited were fading Chinese demand as its economy slowed, with Indian demand experiencing a larger fall according to the world gold council. Chinese gold consumption fell 8 percent in the July to September period, while bar and coin investment dropped 12 percent. Gold prices however were supported over the $1,700 level on prospect that the Fed would continue its quantitative easing program well into 2013.
Oil markets: Although tensions have been escalating in the Middle East, with reports that Israeli government may imminently begin ground operations in Gaza to neutralize the threat of further rocket attacks, oil prices remain subdued as investors continue to fear the repercussion from the US economy falling off the Fiscal Cliff. Oil remained below the $90 level for a second week.
Kuwait: Kuwaiti Dinar at 0.28230. The USDKWD opened at 0.28230 yesterday morning.
The Peninsula
