The Week Ahead

All eyes are on this week’s summit in Brussels.  We have no special insight regarding this event.

US releases this week pack only modest market-moving muscle. We can be certain however that the trend in the US vs the E-Z will continue into 2012; that is, growth in the US will outpace that of the E-Z, and, at an accelerating rate through H1. Key - this is true notwithstanding the outcome of the Brussels summit. The desk may want to take this consideration to heart in setting related spreads.

The UK is of course a different case, depending as it does on the E-Z for the hog’s share of its exports. Aside from an auto manufacturer or two, nothing seems especially rosy (sorry Starbucks, but those 5000 jobs won’t provide much of a jolt), with observers predicting the worst Christmas spending in years, with discounting so severe that stores won’t make any money anyway. Finally, UK firms must tackle the very real possibility of dealing with Club Med types who exit the euro. Folks more in tune than we figure a 40% devaluation, meaning profits for UK firms in those countries would tank when converted to Sterling.

But then all of the above is priced in. In fact, more than priced in because the UK consumer will eclipse expectations. We remain relatively constructive into 2012 given the fiscal prudence shown by the administration and a central bank ready to fire on all cylinders if necessary.  The most obvious (and safest) way to work our view has been the term structure. We had a  satisfactory exercise, ending late October. This spread then flattened given severe flight from the E-Z. We re-entered this spread at the same levels we entered the first trade.  The spread is now at levels of the last exit.  However, unless one senses an immediate and total E-Z melt down, stay with the balance until further notice.

China will continue to contribute over the intermediate term as she attends to her consumer, gradually abandoning her mercantilist ways (and why not as export demand has slackened anyway). In the longer term of course she is in trouble unless officials there read our last piece under Musings.

Finally, events in the Middle East remain a potent wild card, carrying in fact far more potential to wreak havoc than the E-Z could ever come up with. We know exactly what even $5 fuel will do to the world’s primary locomotive - stop it dead in its tracks.


Robert Craven