I wasn’t much for science at school; I was more naturally drawn to languages. Put me in a language lab with a conversation that needed holding and I would have been happy. Science was too formulaic for a young me; a recipe with nothing to eat at the end. Many things that I was taught in our science school have stayed with me as any of my former dons reading this will be glad to know and one crept into my mind last evening.
“Nothing can exist in a vacuum” is a popular idiom rooted in scientific fact – vacuums are by definition devoid of matter. Last week’s markets lived in a normal atmosphere with consistent and pertinent ‘matter’ – economic data in this example – to nourish market gains. Market participants saw equities roll higher, risky assets gain despite worries over China, Ukraine and US economy. This week – in a vacuum where data has been almost non-existent – the opposite has happened.
The big story yesterday were the movements in copper markets. Copper is sometimes called Dr. Copper such is its predictive powers for the rate of the growth of the world economy. The price in recent days has been heading south quickly as investors become more and more concerned over China’s dynamics. Copper is down around 12% on the month, 4% overnight and has seen investors once again slip into haven trades to protect themselves.
It looks like today will be a lot more interesting than yesterday.
Sterling was sold before and throughout Mark Carney’s testimony in front of the Treasury Select Committee yesterday morning. Carney – alongside Paul Fisher, David Miles and Martin Fisher – spoke at length about the UK economy and the changes to monetary policy that the moves in the Bank’s Forward Guidance plan have made. There was little to react upon however, with the market hearing a lot similar to previous speeches by MPC members.
The main monetary policy sticking patch will come on the issue of spare capacity. Carney sounded very dovish, talking about over 1.5% of capacity still to be made up, while David Miles sounded less enthusiastic, and more towards the 1% level. Carney was also asked if the new forward guidance gives the MPC more wiggle room. The BOE Governor said: ‘The judgments we will have to make are more complex’. That’s a politician’s answer if we ever heard it but it does means that the principal driver of decisions will be discretion and not hard and fast rules. Carney also added that QE should only be unwound after several moves in interest rates, not one, and that there was no danger of the interest rate vote being influenced by political timing although May’s decision has been delayed 48hrs so as not to be on election day.
European movement came after a rather desperate pronouncement from ECB Vice-Chair Vitor Constancio. The former head of the Portuguese central bank said that some comments from the ECB last week “may have been misinterpreted; We can still cut rates, do QE or buy assets”. Whether this was to acquiesece calls for QE from a prominent German think tank we will have to wait and see, but a run of inflation releases in coming days will drive euro one way or the other. Spain and Portugal give us theirs today, France, Italy and Ireland tomorrow and Germany on Friday. Given the euro’s sensitivity to inflation in recent months these measures will be closely watched.
Eurozone industrial production is the main release this morning with analysts looking for a bounce back from December’s poor 0.7% fall. A 0.5% gain is expected.
