Joke's on Italy
Euro-risk rises
The inconclusive outcome of the Italian election earlier this week reminded markets of the fragility of the recent calm which has descended upon stock markets. As political risk reared its ugly head once more in Europe after a benign couple of months, investors in equity markets took the opportunity to book some profits on their recent strong run. In Italy, the popular vote was split relatively evenly between three political blocs with the Five Star anti-establishment movement causing the biggest shock as the three year old organisation headed up by former stand-up comedian Beppe Grillo narrowly won the most votes.
More QE coming?
BoE hints
The prospect of further unconventional monetary action by the Bank of England refuses to go away. Following last week’s revelation that three Monetary Policy Committee members, including the governor Sir Mervyn King, voted for more quantitative easing at the last MPC meeting deputy governor Paul Tucker confirmed to MPs this week that the idea of negative interest rates has been discussed by the MPC in a bid to encourage banks to lend more to the small and medium enterprise sector.
Gold tarnished
Six month low
The price of gold has continued to slide southwards as investors have abandoned their favourite safe haven in favour of riskier assets. Gold reached a six month low this week as it dipped below $1,600 an ounce for the first time since August, although this attracted some buying support at this level. Conversely, other metals such as palladium and platinum set new recent highs driven primarily by restricted supply and a return to demand growth from industrial customers. The slide in the gold price has prompted frenzied debate between gold bugs and gold bears with some supporters still clinging to predictions of $2,000 an ounce this year.
AAA crown slips
Moody downgrades
The UK’s cherished AAA credit rating finally succumbed to a downgrade last weekend as the credit rating agency Moody’s cut its rating on UK government debt to AA1. The downgrade was generally handled without alarm by the markets but was greeted somewhat hysterically by politicians, particularly those in opposition who took it upon themselves to use the ratings cut as a stick to beat the chancellor George Osborne with. Labour accused Mr Osborne of being "in denial" about the loss of the UK's AAA status after he insisted the government would simply have to redouble its austerity efforts rather than change course.
Sequestration looms
US cuts
Automatic spending cuts worth billions of dollars look likely to kick in as the deadline for a deal to avoid them passed at the end of February. The US budget office has estimated that the $85bn of spending cuts slated for this year will have a significant impact on the US economy, reducing growth from a projected 2 per cent to 1.4 per cent and potentially costing up to 750,000 jobs by the end of the year. The cuts, known as sequestration, are automatic and across all areas of federal activity although President Obama has warned that they threaten to hurt the defence industry more than most.
UK dips
Economy shrinks
The UK economy was hit by falling exports and a reduction in business spending in the final quarter of 2012, when the economy shrank by 0.3 per cent. Over the course of 2012, according to revised Office for National Statistics figures, the UK economy grew by an anaemic 0.3 per cent compared with earlier estimates of flat growth. In the final three months of 2012 exports dipped by 1.5 per cent and business investment by 1.2 per cent while consumer spending barely moved, edging up by 0.2 per cent. Meanwhile improving economic survey data suggests a pick up in activity will be recorded in the opening quarter of 2013, but current forecasts are for growth of just 0.2 per cent.
