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Research Edge Position: Short the British Pound (FXB), Short UK via EWU

 

Our bearish conviction on the UK economy has held steady this year. Even with the UK reporting a sizable jump in its October Manufacturing PMI survey number (to 53.7 from 49.5 in the previous month) and a marginal increase in home prices over the last three months (Hometrack), broader fundamentals remain shaky: government debt continues to expand, leadership in critical positions lacks (think PM Gordon Brown and BOE Governor Mervyn King), and the country’s leverage to the banking sector remains glaringly negative for recovery. We’re comfortable with our short call on the Pound for a TRADE and today we shorted the UK via EWU in our model portfolio as we expect the FTSE to underperform major global equity markets.

The UK Treasury announced today it will inject another 25.5 Billion Pounds of capital into RBS, increasing the government’s ownership stake of the bank to 84% from 70%, while Lloyds Banking Group also received a boost of some 5.8 Billion Pounds. The bailouts continue to call into question the strength of the UK’s banking sector and suggest future handcuffs associated with acceptance of state aid. 

Today’s decisions comes on the heels of a contracting Q3 GDP print of -0.4% in the UK, shocking forecasters that expected a mildly expansionary number after significant government stimulus expenditures over the last year.  Discussion has now intensified over increasing the Bank of England’s current bond purchasing program of 175 Billion Pounds, a topic we should get more color on tomorrow when the BOE meets to discuss rates. We expect no movement in rates from the current level of 0.5%, as monetary tightening would be imprudent given the country’s negative GDP.

We hold that throwing additional tax payer’s money into the banks won’t end well for an economy suffering from ballooning government debt, lack of leadership, and waning investor appetite with rates at historic lows.  The chart below of FXB shows that the Pound is trading just below its shark line, an important line of momentum in our models.

Matthew Hedrick

Analyst

Nationalization Continued... - Pound a