Daily Market Report 27/02/2013

The euro and the US dollar were the main focus yesterday following results from the Italian general election and Ben Bernanke’s testimony on the US economy and monetary policy.

The results of the election showed that centre-left group leader Pier Luigi Bersani had a narrow victory in the lower house of parliament. However the Senate was split with no party winning sufficient seats to control it. The uncertainty created by the result caused Italian 10 year borrowing costs to rise to 4.91% from 4.37%. Whilst the euro weakened in early trade, the single currency did manage to regain some ground, asking the question “is this weakness in the euro short lived?”

US Federal Reserve Chairman Ben Bernanke seemingly defended the Fed’s quantitative easing program yesterday in his testimony to the Senate. He also urged lawmakers to avoid the spending cuts due to take place on the 1st March as it could put significant pressure on the US economy. Investors, however, seem to look past Bernanke’s dovish comments, driving the US dollar stronger on account of the uncertainty caused by the election results in Italy. Data from the US yesterday showed that consumer confidence, new home sales and the Richmond Fed Manufacturing Index all beat market expectations.

BoE deputy governor Paul Tucker made some interesting comments yesterday, arguing the case for negative interest rates in the UK. The aim of the exercise would be to encourage banks to lend more to businesses; in a similar way that the Swedish central bank imposed negative interest rates back in 2009. Although no decision on the matter has been officially made by the BoE, investors may take fright from the comments on fears of a reduction on interest rates.

Gkf consumer confidence figures from Germany came in as expected putting the euro on the front foot in early trade. Italy will be in focus again this morning with €6.5bln of long-term government bonds on sale this morning as well as consumer confidence figures due for release. UK GDP figures are set to be announced this morning, with the forecast expected to show a contraction of 0.3%. US dollar investors should note that the GBP/USD rate has been steadily falling, approaching important support and psychological levels. Breach of these levels could open up for further dramatic falls in the rate.

Key Announcements:

9.30am – GBP – UK GDP (Q4): Expected to show a contraction of 0.3%.

10.00am – EUR – Consumer Confidence: Expected to rise to -23.6.

10.10am – EUR – Italian 10 Year and 5 Year Bond Auctions.

13.30pm – USD – Durable Goods Orders: Expected to show a drop to -4.4%.

15.00pm – USD – Ben Bernanke Testifies.

15.00pm – USD – Pending Home Sales (YoY): Previous figures were at 6.9%.

17.30pm – EUR – ECB President Mario Draghi Speech