King gloomy over economic picture

Bank of England governor Mervyn King was in a gloomy mood last night as he addressed an Institute of Directors meeting in Liverpool. Justifying the BOE’s recent resumption of QE, he warned that Britain’s economic recovery had been destabilised by events in the Euro-zone and urged European leaders to urgently recapitalise the banking system to restore market confidence. He also took aim at surplus countries – read Germany and China – suggesting those countries running large positive trade balances need to share the responsibility of getting out the current mess by expanding domestic demand and letting deficit countries increase exports and service debt repayments. This is not the first time MK has wagged a disapproving finger in the direction of Germany and China, but combined with his gloomy outlook and yesterday’s inflation figure the whole situation looks fairly grim and Sterling remains under pressure this morning against both the Euro and US Dollar.

Several high profile businesses in the US either reported losses or missed profit estimates and this is weighing on sentiment. Corporate profitability has been a beacon in a sea of gloom over the past few years and any sign of margins beginning to fall will be extremely negative for equity markets and risk assets like Sterling and the commodity currencies. Reports continue to be rife about the size of the EFSF, with reports yesterday evening suggesting EUR2 trillion is the figure that has been decided on, news which has lifted the Euro across the board overnight. But it still remains utter speculation, some think the number will be deliberately exaggerated to grab headlines, but given that this remains in large part a physiological battle between politicians and the markets, the larger the better in our opinion.

Today sees the release of the latest Bank of England minutes, important because the market will want to see if the QE decision was unanimous or not and the prospect of more easing to come. This afternoon we have US CPI data as the highlight of a large American release which also includes a Fed board member specking on the economy.