“UK not facing the same solvency challenge as the eurozone” – Mervyn King
The Bank of England released its financial stability report yesterday which in essence highlighted the fact that has been the main concern of financial markets for a number of months. If the situation in the Eurozone deteriorates into a new credit crunch then the implications for the rest of the world, specifically the UK are significant! Governor King pointed out that British banks were better prepared than in 2008 and indeed that they are “better capitalised than many of their European counterparts” nevertheless he urged further raising of capital buffers “in order to improve resilience in light of continuing threats to UK financial stability”.
We’re heading to Argos, but still we stand tall
Deputy Governor Paul “stingray” Tucker added to the uncertainty by suggesting “anything can happen in the next few months”. Indeed scare stories will continue to dominate the bias of the popular press in the near term despite the relative strength of the UK compared to the predominance of Europe. Fears that the general strike on Wednesday in the UK would have a huge impact on the finances of the country were in some way mitigated (not only by the fact that Cameron described the reality of the strikes as a damp squib) as the FT reports this morning that retail activity was up around 38 percent on Wednesday. Those who can strike, those who can’t shop!
I continue to be in the glass half full camp as far as the UK and GBP is concerned. The ‘tail risk’ event of an all out Eurozone collapse aside (which although now non negligible is a low probability event) the UK is in a much better position to emerge from the crisis: its banks are more stable, consumer savings rates have improved markedly, company (and individuals) balance sheets have been repaired substantially, the UK has a credible government and a proactive central bank, and Nominal GDP is rising – lower inflation and a reduced fear of a ‘terminal’ event in Europe could spark life into the economy quicker than King et al. and the OBR (whose downside revisions are now arguably too low) think!
In the US, a more positive story is starting to emerge. Whilst there is a long way to go before the Federal Reserve can relax its concern over stimulating the economy (and focus its attentions on getting its fiscal house in order), the recent data has been consistently surprising to the topside with yesterday’s manufacturing ISM rising further into expansion driven largely (as was the Chicago PMI data earlier in the week) by strong new orders. A decent payroll number today is likely to be enough to keep risk firmly bid into the weekend. Equities have already made a positive start, yet the bar is potentially quite high, after a much stronger than expected private sector payroll figure on Wednesday. The official expectation is around 125k payroll rise, however I would suggest that the ‘real’ expectations are more like
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