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The big news over the weekend was that of ratings agency Moody's, finally doing what everyone has been thinking and downgrading the UK's credit rating. After the close of London trading, Moody's demoted The UK sovereign from AAA to AA1, with a stable outlook.
The news may have been after close of play in London, but New York traders had a field day selling Sterling and managed to shed a further two cents of its value versus the Dollar in little over 20 minutes, pushing it to lows last seen in July 2010. More frustratingly, the Pound gave back all of its recent gains against the Euro and fell to lows last seen in September 2011, despite lingering concerns in the market that all is not as it seems on the continent.
The downgrade for the Pound is probably not the end of the world. Yes it's hugely damaging to George Osborne's credibility and for a government that vowed to keep us at AAA throughout their term in office, but realistically the impact is likely to be slightly more modest than the headlines suggest and, to a point, a weaker Pound may do us some favours. If the UK can become more export focused whilst the Pound is on the back foot, we have a good chance of boosting levels of exported products and services. We are already a highly competitive export market, but a relatively strong Pound has kept us back. The risk that the Bank of England and the government now have to manage is inflation. In order to see real growth within the economy, we need to ensure that extra income is not eroded by higher prices. This is a price Mark Carney appears to be willing to pay though and he has previously stated that inflation can take a back seat. Though with supermarkets ever more dependent on Europe and Africa for imports and oil continuing to rise, we're not sure how far inflation can rise before we're forced to choose to eat horse meat and run our cars on the cooking oil we fried it in.
Over in Europe, the weekend press has been dominated by the Italian election, where early reports show that Beppe Grillo, the stand-up comedian, could scupper proceedings by gaining as much as 20% of the vote. The markets main fear is that either the populist Beppe Grillo or conservative Silvio Berlusconi will take enough votes to prevent centre-left parties forming a majority. Goldman Sachs have said there is a 50% chance of a negative outcome, which could risk the economy reversing the progress that it has made and definitively reigniting a European crisis. We will start to get results from the first exit polls at around 2pm UK time, with a final count completed on Monday night or the early hours of Tuesday morning.
Other points worth noting in Europe; Protests in Spain saw tens of thousands take to the streets to demonstrate against corruption and austerity. In Greece it is reported that 50% of citizens are still evading tax!
This week will be a game of two halves. First up will be the reaction to the UK's downgrade in European markets. Bizarrely, UK markets are priced to open higher this morning, but only marginally. This afternoon and tomorrow markets will probably be looking more towards mainland Europe than the UK and the outcome of Italy's election and the ensuing political bargaining will be prime focus for any investor with a macro view.
The second half of the week is the possible countdown to the implementation of automatic spending cuts in the US. There will be a lot of political rhetoric coming out of Washington, but markets will accept nothing less than a full solution or, yet another, half measure to delay the implementation and kick the can further down the road. The latter is more likely.
On top of all of the above there's a fair amount of economic data as well as month-end profit taking to keep things interesting.
Thank you CM Trading
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