Despite the unseasonably warm and dry weather, the OECD put a real dampener on British spirits yesterday by claiming that the UK probably went back into recession in the first quarter of this year. According to its analysis, GDP declined by 0.1% in Q1 after a 0.3% fall in the previous quarter. There was plenty of other bad news around for the UK. Nationwide Building Society reported that house prices dropped by 1% this month, with the removal of a stamp duty concession for first-time home buyers curtailing demand for lower-value properties. The latter was principally responsible for a sharp contraction in mortgage lending in February, with mortgage approvals plunging 15% in the month. However, it is also true that mortgage availability is tight and likely to get tighter still. Also, households continue to experience a dreadful squeeze on real incomes, a situation made even worse over recent weeks by the soaring prices of both petrol and diesel. As reported by the FT yesterday, households are being forced to adapt to this new austerity – they are eating and drinking less, with the volume spent on food and drink down almost 10% over the past four years. Some of the news emanating from the corporate sector was also disturbing. Balfour Beatty, the largest construction company in the UK, issued a warning to 12,000 of their UK staff that their jobs are at risk because of the significant slowdown in building activity. FirstGroup shares collapsed after reporting “challenging trading conditions” – in effect, they are struggling to raise fares at a time when the cost of fuel is soaring. It might be a tough time for the British economy, but the upside is that at least consumers are likely to be leaner and more sober as a result.
More strain in Spain. Ahead of today’s eagerly-awaited budget announcement, the pressure continues to mount on Spain’s new Prime Minister. On the economic front, there has been some more depressing news, with house prices falling by another 3.4% in Q1, continuing the sharp deterioration evident over recent quarters. Since the peak in 2007, house prices in both Barcelona and Valencia have plunged by 30%. Against the backdrop of balance sheet contraction in the banking sector, mortgage availability has collapsed. Because of legislation passed last month, banks are required to provision more aggressively for bad property loans, and they must also present plans for recapitalisation by this weekend. Separately, the Bank of Spain believes that the economy has fallen back into recession, which no doubt will complicate the task of the government as they seek to reduce the fiscal deficit which last year was still 8.5% of GDP. Politically, the Rajoy government is in a pickle as well. A huge general strike held on Thursday in protest at the government’s proposed labour reforms drew significant participation, with unions claiming that 77% of workers took part. This follows defeat for Rajoy’s People’s Party in the critical Andalusian regional election on the weekend. Spanish bond yields are once again reflecting this new malaise. The 10yr yield rose another 14bp to 5.47%, the spread to Bunds widening to 365bp. Three weeks ago, the yield was below 5.0%. With Greece in the hands of the doctors, the next patient to require attention may well be Spain. Just as well Europe is set to agree to temporarily bumping up the size of the firewall to EUR 940bn.
Aussie pressured by new China fears. Fresh fears concerning China weighed heavily on the Aussie once again yesterday. The AUD fell to 1.0325, a ten-week low; at the same time it punched through both the 200-day and 100-day moving average for the first time since early January, although overnight it has managed to recover somewhat. Part of the explanation for the constant downward pressure on the Australian currency this month resides with traders closing out their long positions. Early in March, cumulative trader longs were extremely elevated and at their highest level since late July last year. No doubt the constant drumbeat of negative news emanating from Australia’s largest trading partner has triggered some of this activity. Yesterday there were more worrying announcements from the Chinese corporate sector, with some further disappointing earnings being reported by major companies. In response, the Shanghai Composite Index (SCI) fell another 1.4% to a new ten-week low. The SCI is the worst-performing emerging equity market in the past few weeks, whilst the Aussie is the worst-performing major currency. For many traders and investors, the Aussie trades as a surrogate for Chinese growth expectations these days. If the latter continues to deteriorate, then the AUD will rapidly descend to parity.
Oil prices barely budge despite reserve-release talk. For those who subscribe to the theory of ‘Peak Oil’, the recent price action ought to have triggered some cheer. Despite increased talk that America and Europe might reach an accord on releasing oil from their strategic reserves, and despite Saudi Arabia’s promise that it is doing as much as it can to return the oil price to a more normal level, the price of Brent crude remains around USD 125 a barrel. Quite apart from the political risk premium which oil is attracting because of geopolitical tensions, the issue bedevilling oil prices is essentially one of supply disruption and general tightness, notwithstanding the claim made by Saudi Oil Minister Naimi in yesterday’s FT that the market is well-balanced. Iranian oil exports are subject to heavy sanctions and Russian supply has also been restricted. That said, at these elevated prices, there is plenty of incentive for the major oil producers to ramp up production. With some real concerns amongst international policy-makers regarding the potentially adverse effect on growth of oil prices at these elevated levels, we can expect some further steps to alleviate the pressure in the market in coming weeks. How successful they will be is a completely separate matter.