THE EUROZONE WOES HAVE BEEN STERLING’S GAINS
CHIEF MARKET STRATEGIST
AVOLATILE week for markets nevertheless saw stock indices edge up slightly last week, as fears of an immediate Greek exit receded. We now move into a waiting period ahead of the 17 June elections, but a new poll out from Athens over the weekend puts the pro-bailout forces in the ascendancy, although their lead is rather slight. Still, it does seem as if the prospect of a Greek exit from the euro scares the Greek population as much as it does global markets, with polls showing that Greeks would prefer to remain in the euro, even if they hate the austerity measures that go with it. A European summit meeting was, as usual, a complete non-event, with Greece barely being discussed. Such things do not exactly engender confidence among global markets. However, as well as the ongoing Eurozone crisis, we also have a slowing global economy to contend with. Chinese data last week showed that activity in manufacturing remains weak, while export figures from Japan recorded a slowdown in April. With all this going on, sentiment still remains cautious, although the rout in global markets seems to have paused, at least for now.
The continuing degeneration of the Eurozone means that the pound becomes more attractive by default. As a nation with control of its own monetary policy and government spending, the UK is one of the more obvious destinations for money fleeing the Eurozone, even if the crisis will inevitably drag us down as well. IG clients have reflected this move, going from being short on sterling-dollar to 57 per cent long this week, an impressive turnaround when the downward revision to UK GDP from last week is taken into account. So long as the Eurozone crisis continues to fester, sterling’s relative appeal will only increase, suggesting we could see IG clients become even more upbeat about the currency’s prospects.
May has been a difficult month for the Aussie dollar, which dropped below parity against its US counterpart and continued falling. However, the selling seems to have stopped for now, and clients have been picking up Aussie dollar-dollar of late, resulting in exposure becoming more bullish in recent days. If global data picks up, then another run at parity for the Aussie is a possibility.