Market Drivers October 9, 2012
IMF downgrades global growth while Merkel heads to Greece
UK Trade Balance widens more than forecast on oil imports
Nikkei -1.06% Europe – 0.34%
Oil $89.76/bbl
Gold $1774/oz.

Europe and Asia:
AUD NAB Business Confidence 0 vs. -3
JPY Eco Watchers Survey 41.2 vs. 44.2
NZD NZ Card Spending
NZD NZIER Business Opinion Survey 8 vs. -4
GBP NIESR GDP n/a
GBP Industrial Production -0.5% vs. -0.5%
GBP Manufacturing Production -1.1% vs. -0.6%
GBP Trade Balance -9.8B vs. -8.3B

North America:
CAD Housing Starts 8:15

High beta FX was lower in morning European trade hurt by weaker economic data from the region and a gloomy warning from the IMF over further prospect for global economic slowdown in the year ahead. EURUSD tumbled to a low of 1.2905 while cable came within a few pips of the key 1.6000 level as UK Trade Balance deteriorated markedly.

In its nearly 100 page report, the IMF noted that I the global economy has “deteriorated”, growth projections have been “marked down” and that risk factors have become “more elevated”. As a result, the IMF now expects the global economy to grow 3.3% this year – down from an earlier prediction of 3.5%.

“To avoid a sharp downturn, it’s very clear what’s needed is that policymakers take the right decisions. So if you look at Europe, the eurozone now has put in place, in principle, an architecture which is very coherent, the problem is implementation and they really have to implement it, that’s the key,” said the IMF’s chief economist Olivier Blanchard.

Meanwhile in US the IMF focused on the upcoming “fiscal cliff” as the US faces the problem of simultaneous budget cuts and higher taxes at the end of the year. The IMF urged lawmakers to avoid gridlock and come up with a compromise before the deadline kicks in.

“In the US we’re getting closer to this thing called a fiscal cliff, which would be a catastrophe if it happened that quickly. So here it’s clear that there has to be put in place a fiscal plan, not only for this year but for coming years, which is credible,” Mr Blanchard said.

The blunt language of the IMF may have taken market participants by surprise and risk appetite clearly deteriorated as the morning session progressed.Today’s visit by Angela Merkel could provide some relief to euro longs, but only if she signals some sort of softening stance on the country’s fiscal position. If Ms. Merkel simply reiterates her support for Greece to remain in the euro, but offers no fresh relief, the EURUSD could continue lower as global growth concerns dominate trade.

In UK the Trade Balance widened materially to -9.8B versus -8.3B forecast as oil imports weighed on the number. In addition Manufacturing output fell back sharply in August after July saw it recover strongly from the Jubilee led downturn in June, with industrial production also falling, hit by a sharp drop in gas production. Manufacturing output fell -1.1% on the month in August and was down
-1.2% on the year. The reading was well below the median forecast of – 0.6% indicating that UK industrial demand continues to slow as we head towards year end. Despite the much weaker than expected data the 1.6000 level of support in GBPUSD has proven to be a tough nut to crack in mid morning London trade but given the rising tide of risk aversion in the market it should fall as the day proceeds.

In North America today, fixed income traders are back from a bank holiday but the calendar carries only the IBD economic optimism survey. Market anticipates a bump up to 52.3 from 51.8, but the data in unlikely to have any material impact on trade. FX will likely takes its cue from equity flows today and if stocks follow European bourses lower, both EURUSD and GBPUsd will test 1.2900 and 1.6000 respectively as the day progresses.