U.K.'s Bigger-Than-Forecast Slump Pressures Cameron: Economy
Comment of the Day

July 25 2012

Commentary by Eoin Treacy

U.K.'s Bigger-Than-Forecast Slump Pressures Cameron: Economy

This article by Scott Hamilton and Jennifer Ryan for Bloomberg may be of interest to subscribers. Here is a section:
Signs of a deepening recession may add to calls for the government to do more to boost growth even after the Bank of England started a credit-easing program and increased emergency bond purchases. The International Monetary Fund said last week Chancellor of the Exchequer George Osborne might have to ease his fiscal squeeze and the central bank should expand stimulus further if efforts to kick-start the economy fail to deliver.

“It is looking very unlikely that growth on average for this year can get on the right side of zero -- more likely a small contraction,” said Alan Clarke, an economist at Scotiabank in London. “Can the coalition government or the BOE do anything about the rain or lost working days? No, but that won't stop claims that austerity is to blame and the BOE should do more.”

Eoin Treacy's view In addition to its weak domestic economy, the UK has to contend with a challenging environment for its exports in Europe both because of slowing demand and the weakness of the Euro. Aside from weather and celebrations the Eurozone crisis is a more likely drag on the economy than other factors.

The Pound has held a progression of higher reaction lows against the Euro for the last year. It broke successfully above €1.20 in April and encountered resistance this week near $1.30 having developed a short-term overbought condition. A sustained move below the 200-day MA, currently near €1.2175, would be required to question medium-term scope for additional upside.

UK Gilt yields hit a new low on Monday and while there has been no downside following through, a clear upward dynamic will be required to indicate supply is beginning to reassert itself. The Bloomberg/EFFAS UK 10yr+ total return index had become quite overbought when it hit a near-term peak close to 650 in June. It held the majority of the earlier advance as it at least partially unwound the overextension relative to the 200-day MA and rallied to retest the peak this week. A sustained move below 600 would be required to question the consistency of the medium-term uptrend.

The FTSE-100 recouped approximately half its earlier decline from the June lows but has pulled back rather sharply this week and will need to find support above 5200 if medium-term potential for continued higher to lateral ranging is to remain credible.

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