Spanish assets were once again back in focus on Friday with gains for the Iberian financial sector leading to similar moves across Europe. This also dragged tye euro higher and weakened the dollar as investors once again felt comfortable to take on risk.
The combination of a successful bond auction on Thursday with the decision to publish the details of banks’ stress tests have helped sentiment higher. There are of course still fears over the prospects for Spain and the eurozone but they have lessened a little recently. They are also a little overshadowed at the moment by 2 important changes in the landscape of 2 very different economies.
China has been under pressure to revalue its yuan currency for years now. Critics of Beijing say it is artificially very weak so as guarantee that their exporting industries continue to grow. Beijing have been maintaining a peg to the dollar for the past 2 years but have said over the weekend that they are prepared to adopt a more “flexible” policy. Hopes that we would see an immediate appreciation in the yuan have been stymied however as Beijing said not to expect “large moves”. Nevertheless this decision has strengthened risky assets in Asia, a factor that is feeding through to Europe and into the currency markets this morning.
The other major news is of course that of the UK budget. George Osborne’s first budget is probably the most important budget in the UK since the 1970s. Osborne’s plan is to tackle the deficit now, a plan that government sources expect to cost jobs and growth in the short term. We here at World First also expect to see rises in VAT, CGT and a new bank levy in the speech tomorrow afternoon. In the meantime we expect sterling trade to remain volatile.
There is very little data out today and we expect the China story to keep risky assets, the euro included, elevated today.
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