Daily Market Update 25 February 2009

Daily Market Update 25 February 2009

US stock markets rallied strongly yesterday after Fed Chair Bernanke gave a cautious assessment of the economic outlook, providing hope that the recession would end in 2009 as long as the correct measures to recapitalise the banking system are taken. With Asian bourses also closing higher, we expect to see some rebound in Europe this morning, although that partly reflects some bargain-hunting after recent losses.

The euro continued to lose ground across the board, reflecting fears that the eurozone’s exposure to Eastern Europe would cause further problems. With the contraction in German output in Q4 confirmed at 2.1%, euro-sterling slipped below £0.8850.

Key data due this morning include the second estimate of UK Q4 GDP. The Advance estimate showed the economy contracting by 1.6% and there are fears of a downward revision in light of the 3.9% fall in business investment –the sharpest fall since 1991- that was released yesterday. However, the most interesting point about the release is that we will obtain the expenditure breakdown and it is possible that a hold up in consumer or government spending means that downward revisions are not as large as feared. That said, retail sales only make up around 30% of the consumption basket, with the rest going on utilities, rents and expenditure on services. We expect the latter to have contracted as households stop going out so much during the recession.

Either way, the pound is likely to remain nervous ahead of the release and we would only expect sterling to advance against the yen, which has been on the defensive across the board during Asian trading after Japanese exports fell by 45.7%yoy in January, leaving the trade deficit at a record level (data have only been collected since 1980). Sterling-yen reached a 10 week high this morning, with the cross breaking through ¥141, leaving a test of ¥142 possible ahead of the GDP release.

The market is looking for a small rise in US existing home sales in January, with a 1.1% rise on the month following December’s 6.5% bounce. However, we believe that it is too early to report a recovery in the US housing market. Instead it seems that foreclosed homes are selling strongly, but private sales at higher prices are stalling as potential buyers wait for further price falls.

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