3 Numbers to Watch: Cyprus test, UK retail sales, US cons. sent.
UK prime minister Cameron postponed his eagerly awaited address on UK-EU relations because of the failed counterterrorist operation in Algeria – I expect him to address the nation, and the style and content will be comforting, but might also be hard on “enemies” – gold, oil and USD could be bullish if that happens. German chancellor Angela Merkel is to meet MArtin Schulz, president of the European Parliament. Some generic statements on Cyprus, for example, might follow. The USDJPY's new highs ahead of next week’s Band of Japan meeting might also attract attention as it could be seen as an undesirable currency war-style competitive devaluation – especially by China or Europe. The International Monetary Fund will publish reports on Portugal and Greece though it already agreed on the bailout payment tranches on Thursday. Still, it would be nice to see how the IMF views these countries’ developments, if only to guess when Greece has to get a new haircut.
Cyprus Bank Stress Tests from PIMCO (n/a GMT) Pacific Investment Management Company (PIMCO), one of the world's largest investment houses, is scheduled to present stress test results of the banks of Cyprus. The banks of the small island nation have been heavily hit by the losses arising from holdings of Greek government debt, and its government is expected to run out of cash by the end of March, requiring a full EU bailout. This is a highly controversial issue, as the size of the banking sector is huge, private sector haircuts are not applicable and the whole banking system is mostly known as a tax- and safe haven for, among others, Russian corporations. Early estimates for the bailout needs are EUR 7.5bn for public finances and a rumoured EUR 9bn for the banks, for a total of EUR 16.5bn – almost the size of the island’s annual GDP.
The Financial Times’ Alphaville blog had a nice piece suggesting that the country’s ample natural gas reserves could be used to guarantee a successful bailout. While I do not expect PIMCO’s estimate to surprise by much, it will be interesting to see what the stress scenarios used actually are, and what the banks have on their balance sheets. Given the politically difficult times ahead because of the Italian (and later in the year German) elections, a fourth euro area-bailout country does not make many EU friends, and we could see a step up in rhetoric. Harder EU rhetoric is to be seen as negative for the euro and peripherial bond yields – I expect the analysis of the stress tests to be finished by outside analysts during the weekend and the rhetoric to start flying early next week.
UK December Retail Sales (09:30 GMT) is expected to show a year-on-year increase of 1 percent and a month-on-month increase of 0.2 percent (after November’s +0.9 percent and +0.0 percent). This number is probably practically meaningless in face of the larger issues, but the day is light on data, so it is worth keeping an eye on. A bad number could lead to expectations of threshold-style central banking in the near future, and thus weaken sterling. GBPUSD is currently approaching a support level, and also EURGBP is nearchannel top, so a negative surprise could take us to tactically interesting levels.
US January Michigan Consumer Sentiment (14:55 GMT) The preliminary sentiment index is expected to remain almost unchanged at 75 (74.5 in December). To me this feels a bit strange - hard data for the end of the year has been largely better than expected, but scaremongering ahead of the fiscal cliff and now the debt ceiling obviously have hurt the sentiment. The lower sentiment did not show up in retail sales or housing statistics, and the recent years’ range (marked in the chart with a light-blue rectangle) of the sentiment index would suggest a “reversion towards mean” of around 77-78, so I have a feeling that the sentiment could (if not now, soon) surprise positively. If and when the debt ceiling is solved and housing data remains good, return to above 80 could be around the corner.