One of the apparent mysteries of the finance world is arbitrage, “a transaction that involves no negative cash flow at any probabilistic or temporal state and a positive cash flow in at least one state”. Put like that it sounds all too complicated for non-propeller-heads. In simple English, however, it simply means collecting a risk-free profit. And anyone who thought that was impossible should have a look at Tesco’s Price Check. If you buy something at Asda that costs less than it does at Tesco, Tesco will give you a voucher for twice the difference. The Daily Mail quotes an example of one shopping bag that cost £17.48 at Asda and £38.46 at Tesco. The Price Check promise meant the customer could claim back twice the £20.98 difference, leaving them with a bag full of shopping and £24.48 in their pocket. Having now spotted the flaw in its strategy, Tesco has put a £20 cap on each voucher but why not take the whole family to Asda tomorrow and do a bit of arbitrage?
If only it were so easy to make a profit in the currency market. Only three days ago UK inflation continued its inexorable rise to touch 4.4%, well over twice the 2% target. Logic would suggest a reaction from the central bank to tighten the supply of money, thus restricting consumers’ ability to chase prices higher still. Logic would also point to a strengthening of the currency as investors took a more active interest in the higher returns it offered – or would soon offer. Yet since the inflation data came out on Tuesday morning sterling has fallen by nearly two and a half cents against the US dollar and by a cent and a half against the euro. It has even lost two yen, the currency that five of the six biggest central banks in the world are holding down with their intervention.
Yesterday’s UK retail sales figures gave investors another excuse to harass the pound. They had been primed for a weak performance in February; -0.6% was the consensus for the month with annual growth shrinking from 5.3% to 2.4%. The actual figures trumped that for nastiness. Sales were down by -0.8% on the month, the annual increase was just 1.3% and the annual rise in January was downwardly revised to 5.1%. If the -0.8% monthly shrinkage doesn’t sound too far adrift from the expected -0.6%, bear in mind it represents the difference between an annualised decline of -9.2% and one of -7.0%. The Office for National Statistics put on a brave face, describing it as a “mixed picture in February” because sales in non-food stores increased by 2.0% over the year, but investors were not convinced. By the end of the day they had taken the pound another cent lower against the dollar and the euro.
The euro, meanwhile, was also apparently defying logic as it rose on a broad front despite the collapse of Portugal’s government that pushed the country’s borrowing costs above 8%. It seems investors were pinning their hopes on a successful outcome to the creation of a permanent EU financial stability fund and, of course, an interest rate increase from the European Central Bank in two weeks’ time. It must have been something like that because there was nothing in the day’s ecostats to send the euro higher. Purchasing managers’ indices from Germany and Euroland showed the services sector edging ahead while manufacturing slowed. Even ratings downgrades for Portugal, announced overnight, did no lasting harm to the euro, doubtless because they were inevitable. There is a sensation that the market has been waiting so long for Portugal to go into receivership that it will be a relief when the deed is actually done.
As if to prove the market’s inconsistency, the yen did not even twitch when figures came out showing that Japanese consumer prices had not budged an inch in the year to February. With an inflation rate that seldom moves above zero the Bank of Japan could stick to its near-zero policy interest rate for years. Yet the yen still needs central bank intervention to keep USD/JPY above 80. Since the beginning of the week it has flat-lined within a range of just half a yen. Investors might be scared to buy the yen with G7 on their case but no way are they going to sell it.
Sterling is off the hook today as far as ecostats are concerned and the only Euroland data that count are for German consumer and business confidence. There could be small upward revision to US fourth quarter economic growth and a small downward one to the Michigan University consumer confidence index. That will leave investors plenty of time to ponder developments at the EU leaders’ meeting. The permanent financial stability fund seems to be settled although, with figures of €400Bn to €700Bn attached to it, the final size of the fund is still apparently up for grabs. The cost of a bailout for Portugal is similarly in doubt but more important is who will sign up for it now the prime minister has resigned.
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