The flu outbreak continues to dominate the news (and continues to be called swine flu in spite of no evidence of this strain being found in pigs, although that hasn't stopped the Egyptians killing all their domestic stock of pigs.), but the markets seem to have shaken off the initial panic, probably due to the deaths caused by the flu being confined to Mexico, although of course the panic could always come back, and with the first person to person transmission in the UK likely to be confirmed later today, there are signs the outbreak is spreading. However the markets have been concentrating much more on the health of the global economy, and there have been some promising signs, with Japan getting in on the act reporting it's first real rise in industrial production for 10 months, while the PMI also rose significantly. Coupled with better than expected US data out yesterday, European markets ended the month positively, recording it's biggest monthly rise since 1997.
US markets have also risen strongly, but were hit late yesterday with more worries about Chryslers collapse, although Obama thinks that administration will actually be a boon for the company, there was also some profit taking which took the equity markets down, but with improved regional surveys and better than expected jobless figures, the general sentiment was still positive, which as usual hurt the Dollar as a safe haven currency, allowing the Pound to climb briefly above 1.49, before a sharp correction brought it down to 1.48. The Euro also climbed to 1.33 against the Dollar, while the other safe haven currency, the Yen, suffered allowing the Pound to climb towards Y147, continuing the rally over the past few days after a sharp fall last week.
Sterling has kept steady against the Euro, climbing briefly up to 1.12, before dropping back yesterday, as European traders closed positions preparing themselves for the May day weekend, they have their bank holiday today, whereas we have ours on Monday. Any gains for the Euro are likely to be capped by the fears/hopes that the ECB may announce a willingness to use QE measures, and the accepted view that the ECB will cut rates by a further 25bp at next Thursday's meeting. If the ECB do announce a softening of their stance on QE, then the Euro could slip significantly.
With European markets closed today the markets are likely to be relatively subdued, but the UK are still in business, with lending figures released for the economy as a whole, as well as PMI for manufacturing which will be watched for further signs of improvement which would be a further indication that the worst may be over, the US also has a manufacturing PMI and if these two figures come out positive many investors will head into the long weekend feeling a little bit happier.
Michael Corcoran | Treasury Solutions Partner | National Australia Bank Limited