The pound is a “sick little puppy” as it hits a 10-month low and is expected
to continue its decline, analysts warned, after UK retail unexpectedly
declined in December.
"UK retail sales left their mark on sterling," said Kathleen
Brooks, research director of UK, Europe and Middle East at Forex.com.
"This [retail sales] data is not disastrous, but it does suggest the UK
consumer is cautious as we start 2013.
"The pound is definitely in the weak basket of currencies right now and
with interest rates so low and unlikely to move higher any time soon. We may
not have seen the bottom in sterling just yet."
Retail sales unexpectedly fell 0.1pc in December, dashing hopes that Christmas
shoppers would provide a last-minute lift to an economy on the verge of
another contraction.
The contraction, which also produced the slowest year-on-year growth in
December sales since 1998 – with the exception of 2010 when a harsh winter
battered trade – was driven by non-food goods, according to Office for
National Statistics' figures.
The pound has now fallen more than 2.5pc so far this year.
“Sterling continues to look like a sick little puppy as [it] firmly sliced through the key 1.60 [against dollar] and 1.20 [against euro] levels like a pair of knives through hot butter,” said Lee McDarby, head of dealing for the corporate & institutional treasury desk at Investec.
“The ease at which these psychological rates gave way suggests that this downwards slump for the pound is not necessarily over just yet.”
There was further pressure on the pound after excerpts from a proposed speech by David Cameron were released today. They show Mr Cameron had planned to warn that Britain risked “drifting towards the exit” of the EU unless there was fundamental reform.
The Prime Minister's speech, originally understood to be planned for January 22, was brought forward to avoid it coinciding with an anniversary marking 50 years of Franco-German friendship, but was postponed again today due to the hostage crisis in Algeria.
Investors have become concerned that a loosening of the Britain’s relationship with the EU will threaten London’s role as a financial centre.
New Bank of England policymaker Ian McCafferty also raised doubts about the pound on Friday, questioning whether sterling was at the right level to ensure economic rebalancing, and said the central bank should be open to new policies.
Asked in a Bloomberg TV interview whether he would favour a weaker level for sterling to help exports, McCafferty said there "are questions on whether sterling is now at a competitive level in terms of allowing that fundamental rebalancing".
Conversely, the euro is being lifted by the market’s perception that the eurozone is a safer place to invest so far this year.
Mr McDarby said it was becoming more and more apparent that hedges to protect against a collapse of the single currency were being unwound, with the euro "firmly returning to vogue".
Earlier this month, HSBC said the sterling would weaken further as it faced a destructive "triple cocktail" in 2013".
"The pound's fiscal credibility is under threat as a sovereign downgrade looms," the bank said in its 2013 HSBC View.
Alongside that, the bank says austerity is now kicking in at a time when the MPC appears less activist which could see a 'what's wrong with a weaker currency' attitude prevail.
And the UK's failings will start to "grab attention" as the US steps back from the fiscal cliff, momentum grows in China, and eurozone break-up fears diminish.
"The pound looks set to lose the contest of the uglies," the HSBC report said, as its "frailties emerge from the shadows".
Sterling faces destructive 'triple cocktail' in 2013
Sterling will weaken this year as Britain faces a potentially testing triple cocktail of destructive factors, says HSBC.
Telegraph: "The pound's fiscal credibility is under threat as a sovereign downgrade
looms," the bank said in its 2013 HSBC View published on Monday.
And the UK's failings will start to "grab attention" as the US steps
back from the fiscal cliff, momentum grows in China, and eurozone break-up
fears diminish.
"The pound looks set to lose the contest of the uglies," the HSBC
report said, as its
"frailties emerge from the shadows".
HSBC forecasts the pound
will be trading around $1.52 against the US dollar by the end of the year,
down 5pc from $1.60 at present.
While a falling currency will help boost exports and is good for big British companies that do most of their business abroad, it increases the cost of imports and makes holidays abroad more expensive.
HSBC expects to see big swings up and down for shares this year but ultimately eking out a decent return of around 15pc, against 5pc-6pc in fixed income.
Like other fund managers and economists, the bank believes that investor who have piled into bonds over the past four years, could switch to shares in search of higher returns.
"Investors now are paid very little for owning bonds: 10-year US inflation-protected securities now yield -0.8%, and credit spreads are at their lowest level since 2007. As equity volatility continues to fall, we think investors will slowly appreciate again the merits of equities." HSBC said.
This view is echoed by a number of large fund managers such as Fidelity, Black Rock, and Goldman Sachs Asset Management who have seen signs that investors could start to switch from high priced “safe haven” assets into shares.
Equity strategists at Investec expect Britain's FTSE 100 index of leading shares to end the year up nearly 10pc at 6,650 as investor dump bonds for equities.
"We are particularly bullish on dividend yielding stocks. Growth stocks should also benefit from a sustained negative real interest rate environment as a lower discount is applied to the longer-dated cash flows of such stocks, " said Andrew Fitchie and Roger Cursley.
From a macro perspective, Investec foresees sustainable growth from the US and a more encouraging turn in economic momentum in China will buoy stock markets. They expect no sudden rebound in the "chronically ill" eurozone.
The UK is a "mixed picture but on balance, recent data indicates very modest, but nonetheless positive, momentum in the economy".
"Amid talk of a 'triple dip' recession, we see an economy that has been bumping along around 0pc growth (plus or minus a little) as fiscal tightening and spending cuts have played a tug-of-war with quantitative easing. Of late, we see some encouraging signals.
"There have been some positive indications from housing market transactions and the consumer picture has been better than expected. No one is pretending it will be an easy road ahead. However, momentum, whilst slow, in our opinion, is positive for the UK in 2013."
Investec forecasts GDP growth on 1.5pc in 2013 and 2.2pc in 2014, up from -0.1pc in 2012. It also predicts a weakening of the pound against the dollar.
Investec is positive about the prospect for consumer goods. In financials, it sees real estate benefiting from the flow of funds into equities.
However, the analysts are neutral on banks – "The sharp rebound in the shares during the second half of 2012 has eliminated much of the upside and continuing low interest rates are not conducive to earnings upgrades".
They are bearish on oil and gas producers, but see growth in companies supplying oil equipment and services. Other sectors regarded as out of favour are retailers, particularly food, and mobile telecom’s "given structural challenges".
The FTSE 100, which was trading down 25 points or 0.4pc on Monday afternoon, is up just under 3pc in the first few days of trading in the New Year. The index rose 5.8pc last year.
Source
All via Max Keiser
While a falling currency will help boost exports and is good for big British companies that do most of their business abroad, it increases the cost of imports and makes holidays abroad more expensive.
HSBC expects to see big swings up and down for shares this year but ultimately eking out a decent return of around 15pc, against 5pc-6pc in fixed income.
Like other fund managers and economists, the bank believes that investor who have piled into bonds over the past four years, could switch to shares in search of higher returns.
"Investors now are paid very little for owning bonds: 10-year US inflation-protected securities now yield -0.8%, and credit spreads are at their lowest level since 2007. As equity volatility continues to fall, we think investors will slowly appreciate again the merits of equities." HSBC said.
This view is echoed by a number of large fund managers such as Fidelity, Black Rock, and Goldman Sachs Asset Management who have seen signs that investors could start to switch from high priced “safe haven” assets into shares.
Equity strategists at Investec expect Britain's FTSE 100 index of leading shares to end the year up nearly 10pc at 6,650 as investor dump bonds for equities.
"We are particularly bullish on dividend yielding stocks. Growth stocks should also benefit from a sustained negative real interest rate environment as a lower discount is applied to the longer-dated cash flows of such stocks, " said Andrew Fitchie and Roger Cursley.
From a macro perspective, Investec foresees sustainable growth from the US and a more encouraging turn in economic momentum in China will buoy stock markets. They expect no sudden rebound in the "chronically ill" eurozone.
The UK is a "mixed picture but on balance, recent data indicates very modest, but nonetheless positive, momentum in the economy".
"Amid talk of a 'triple dip' recession, we see an economy that has been bumping along around 0pc growth (plus or minus a little) as fiscal tightening and spending cuts have played a tug-of-war with quantitative easing. Of late, we see some encouraging signals.
"There have been some positive indications from housing market transactions and the consumer picture has been better than expected. No one is pretending it will be an easy road ahead. However, momentum, whilst slow, in our opinion, is positive for the UK in 2013."
Investec forecasts GDP growth on 1.5pc in 2013 and 2.2pc in 2014, up from -0.1pc in 2012. It also predicts a weakening of the pound against the dollar.
Investec is positive about the prospect for consumer goods. In financials, it sees real estate benefiting from the flow of funds into equities.
However, the analysts are neutral on banks – "The sharp rebound in the shares during the second half of 2012 has eliminated much of the upside and continuing low interest rates are not conducive to earnings upgrades".
They are bearish on oil and gas producers, but see growth in companies supplying oil equipment and services. Other sectors regarded as out of favour are retailers, particularly food, and mobile telecom’s "given structural challenges".
The FTSE 100, which was trading down 25 points or 0.4pc on Monday afternoon, is up just under 3pc in the first few days of trading in the New Year. The index rose 5.8pc last year.
Source
All via Max Keiser
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