The revival in global stock markets continued to bolster Sterling sentiment yesterday as the Pound rallied towards the highest level in a week versus the Dollar, while the UK currency also climbed for a third day against the Euro as a cut in U.S interest rates increased the allure of higher-yielding currencies.
The Pound has enjoyed its longest winning streak against the Euro in almost two weeks after UK and U.S stocks rallied higher following the Federal Reserve’s decision to lower borrowing costs by 50 basis points and provided a further $120 billion to spur lending in emerging markets.
U.S interest rates currently stand at just 1.0% with the UK benchmark lending rate at 4.5%, which remains the highest among the Group of Seven nations, and the recent revival in risk appetite is making the Pound a far more attractive commodity for investors.
The UK currency rose a further 1.8% versus the Dollar by the close of trading last night, rising to a high of $1.6672 after posting the biggest two day gain in more than 23 years this week as the UK FTSE 100 index gained for a third consecutive day.
Nevertheless, the Pound is still down over 8% versus the Dollar since the end of September and is poised to record the fourth monthly drop against its U.S counterpart but there are signs that the market has hit a near-term bottom as central banks around the world cut rates and inject liquidity.
In terms of economic data, the Pound shrugged off an earlier report from the Nationwide Building Society, which showed that UK house prices fell by the most since records began in 1991 with the average cost of a home dropping 14.6% from this stage last year.
Home values continue to decline as banks and lenders alike tighten credit conditions, while the probability of the first recession in seventeen years has deterred potential buyers despite the likelihood of a further substantial reduction in borrowing costs.
In a speech to the University of Kent yesterday, Bank of England policy maker David Blanchflower highlighted the necessity for a significant reduction in interest rates saying, “if rates are not cut aggressively we do face the prospect of a relatively deep and long lasting recession”.
Blanchflower has advocated the need to lower interest rates for the past year and the short-term revival in Sterling sentiment may be severely tested in the run up to the next rate announcement on November 6th amid speculation of a 1% cut.
The Monetary Policy Committee have already lowered the benchmark lending rate by half a percentage point in October in a coordinated joint action with six other central banks to stem the crisis even after consumer price inflation accelerated to 5.2% last month.
The rising appetite for high-yielding currencies has sent the Euro rising higher against the Dollar but the single currency continued its downside momentum versus the Pound after an index of European consumer confidence fell to a record level in October.
The escalating financial crisis restricted corporate investment in the region as sentiment plummeted and the index of sentiment dropped more than initial forecasts to register the sharpest fall since the data was first compiled in 1985.
The Euro-zone economy is obviously in the grip of a recession and the Euro may continue to decline against the majority of the majors as a report this morning is expected to show consumer prices retreated in October, which correlates with the vast decline in oil prices over the past three months.
The rise in stocks, commodities and equity markets over the past week has curtailed the Dollar’s momentum and the greenback failed to find any support yesterday following reports that the U.S economy suffered its biggest decline since 2001 in the third quarter.
Gross domestic product contracted 0.3% in the three months through September, raising the prospects of the worst recession in a quarter of a century and therefore boosting the chances of Barack Obama and fellow Democrats in next week’s elections.
According to the report from the Commerce Department, the decline was actually worse than anticipated but the economy may be poised for a larger drop this quarter after the record 20-year expansion in consumer spending came to an abrupt end.
The decline in the Dollar was also exacerbated following comments from the Federal Reserve chairman Ben Bernanke, who signalled yesterday that he’s ready to cut interest rates to the lowest level on record should the Reserve Bank’s actions fail to stem the deepening economic slump.
The Pound has enjoyed its biggest two-day advance against the Dollar in over 23-years as UK stocks rallied for a second consecutive day yesterday, while a separate report showed that mortgage approvals actually rose for the first time since June 2007.
The UK currency made widespread gains across the board, rising by the most in nearly eight years versus the Euro after a report from the Bank of England showed that lenders approved 1,000 more home loans last month than in August and the FTSE 100 Index surged 7.1% on the session.
UK lenders approved 33,000 loans in total for home purchases in September, up from 32,000 in August, which is still near the lowest level since comparable records began in 1999 but the unexpected increase, however modest, was the catalyst in sending the Pound rising higher against the majority of the majors.
There is an element of risk appetite creeping back into the market as equities and commodities recover earlier losses and although the Pound is headed towards the longest run of declines since February 1993, there are signs that investors are returning to high-yielding currencies as stability returns to the market.
The Chancellor of the Exchequer Alistair Darling said yesterday that the government will pledge extra borrowing to support economic growth as the official figures suggests that the UK economy has entered its first recession since 1992.
The short-term recovery in Sterling sentiment will last as long as risk appetite develops and the Pound jumped 3.4% in value against the Dollar yesterday, rising to a high of 1.6474 in London from just $1.5901 yesterday, bringing its two day gain to 5.6%, the most since September 1985.
The degree of confidence returning to global financial markets was also evident in the Pound’s performance against the Yen and the UK currency continued that momentum yesterday after gaining by the most in 37-years the previous session.
In addition, the Australian and New Zealand Dollar have both made substantial gains against the majors, including the Pound, while the Canadian Dollar has benefited from an increase in the price of crude oil, which increased more than $4 in New York amid speculation that a rate cut would boost fuel demand.
There has been widespread speculation surrounding the Bank of England rate announcement on November 6th and policy makers will probably cut their key interest rate by half a percentage point to 4.0% to match the Fed’s action yesterday evening.
The Monetary Policy Committee have already lowered rates by 50 basis points in a coordinated effort with six other central banks earlier this month in an attempt to stem the financial crisis and provide some confidence to the global banking system.
The shift in sentiment away from an environment of ‘risk aversion’ has also helped the Euro sustain some unlikely momentum against the Dollar but the single currency continued to decline against the Pound, closing just under 1.2700 last night after reaching 1.2756 earlier in the session.
The harmonised index of German consumer prices showed that the annual pace of inflation slowed by more than economists forecasts in October, which correlates with the overwhelming fall in energy prices feeding through to the broader economy.
Oil prices have more than halved since reaching a record high of $147.26 a barrel in July, reducing the risks to the price stability across the Euro-zone and the ECB President Jean-Claude Trichet said this week that the bank may lower borrowing costs again in November.
The inflation rate declined to 2.5% from the 3% in September and the report gives the European Central Bank the scope to lower interest rates from the current levels and help bolster the economy as growth slips deeper into contraction.
The Dollar slumped by the most since 1998 against the majority of the major currencies yesterday and extended that decline after the Federal Reserve cut interest rates to a level matching the lowest in the last 50-years last night.
The Dollar’s perceived safe haven status has sent the U.S currency rising to the highest level in five years versus the Pound this month and a further drop in borrowing costs will make the Dollar an even more attractive commodity to investors if the historic level of volatility surrounding financial markets returns.
Nevertheless, with the appetite for risk slowly creeping back into the market, the Dollar remains under pressure in the short-term as the greenback slumped a further 2.1% versus the Euro and the Fed confirmed that risks to the economy remain the primary concern.
A recovery in U.S stocks combined with a two day jump in oil prices has also hurt Dollar sentiment, while data yesterday showed that U.S durable goods orders fell for a second consecutive month in September as the credit crisis curtailed sales and caused a lack of business investment.
The 1.1% drop in bookings was indeed slightly less than economists forecasts but the slump in manufacturing has worsened in October and the decline in investment will contribute to a contraction in the U.S economy for the second straight quarter.
The Pound bounced back against the Dollar yesterday, snapping a seven day losing streak to breach the $1.6000 level by the close of trading last night, while the UK currency also registered gains versus the Euro after rising equity and commodity markets bolstered demand for Sterling.
A modest revival in the UK stock market saw the FTSE 100 Index jump as much as 4.7% yesterday, while crude oil prices also bounced over 2% higher, and the Pound’s relative strength index signalled that it was poised to rebound versus the Dollar after falling to the lowest level in five years.
The strong correlation between currencies and equities has become all too apparent of late and the gains in equity markets yesterday brought a renewed appetite for risk back into the market as traders bought back into the high yielding currencies amid signs of an economic recovery.
That sentiment was also reflected in the performance of the Japanese Yen yesterday, which declined 4.8% versus the Pound from Monday to record the largest downward move since at least January 1971.
The Pound slumped to a low of $1.5279 on Monday but the UK currency enjoyed a strong intraday surge against the its U.S counterpart, after sliding more than 10% in value in October alone.
The big question is whether the Pound will be able to sustain this momentum beyond the short-term, particularly considering the heightened sense of speculation that the Bank of England will implement a 100 basis point reduction in interest rates next week.
In addition, a recent report from the Office of National Statistics showed that UK economic growth contracted 0.5% in the third quarter as the economy drifts towards the first recession since 1992.
The deputy governor of the Bank of England John Gieve said in a speech yesterday that financial markets are under “acute” strain and the recent falls in equity and corporate bond prices is affecting long-term institutional investors, including hedge funds.
The slump in housing has seen the number of foreclosures jump 71% in the second quarter as higher interest rates made it harder for property owners to pay off their mortgages.
Investors and traders have stepped up bets that the Bank of England will cut its main interest rate on November 6th but the Prime Minister Gordon Brown hinted on Monday that the Central Bank may be forced into another coordinated round of cuts this week.
The Euro struggled to stem the losses against the Dollar yesterday, dropping to the lowest level in more than two years, while the single currency also relinquished earlier gains against the Pound following speculation that the ECB will also cut interest rates as the global credit crisis pushes the economy closer towards contraction.
In addition, the Euro slumped for a third straight day as a report in Germany is expected to confirm that consumer confidence in the region’s largest economy will fall to the weakest level since June 2003 and the ECB President said yesterday that policy makers may cut borrowing costs next week.
Europe’s economy stands on the brink of recession with growth in manufacturing and service industries contracting at a record pace in October, while the Ifo index showed business confidence slumped to a five year low.
Despite making further gains against the Euro, the Dollar succumbed to a revival in global stocks as the Dow Jones Industrial Average recorded its second best point gain in 23 years, which encouraged investors that credit markets are stabilising.
In terms of economic data, U.S consumer confidence dropped to a record low and house prices in 20 U.S cities continued to fall from this stage in 2007, while the focus will switch to the FOMC rate announcement this evening where policy makers are forecast to lower borrowing costs from the current 1.5%.
The Pound declined to the lowest level in almost five years against the Dollar yesterday, while the UK currency also slumped to a near all-time low versus the Euro following reports that UK house prices dropped by the most in since records began in 2001 and UK stocks continued the downward momentum built up from last week.
The FTSE 100 Index fell to the lowest level in five years, led by a decline oil service companies and commodities producers, as crude oil prices retreated to the May 2007 low amid concerns that a global recession will slash fuel consumption.
UK stocks lost a further 0.8% on the session after earlier falling as much as 5.6% at the open and the index has now slid 21% so far in October on concerns that a global slowdown will curb corporate profits, while the decline in stocks has coincided with the slump in Sterling, which has now fallen over 12% against the Dollar in October alone.
According to a report from Hometrack Ltd, property prices fell the most in at least seven years this month as the average cost of a home in Britain slipped 7.3% to £163,200 and prices will keep declining over the coming months as the economy deteriorates and edges closer towards a recession.
The seizure in global credit markets has made banks and lenders reluctant to lend and the subsequent reaction on consumer spending saw economic growth slip into negative territory for the second successive quarter in the three months through September, while unemployment has climbed by the most in over two years.
The heightened expectations of a forthcoming recession combined with the rising jobless rate will continue to undermine demand for housing and the London based research group said that ‘continued price falls are inevitable’ over the coming months.
UK house prices are expected to decline by 25% by the end of next year from the highest point in the third quarter of 2007, while the Centre for Economic and Business Research said in a separate statement that prices will come back towards the 2004 levels.
The Pound subsequently fell for the seventh consecutive day against the Dollar, trading at a low of $1.5280 earlier in the session before bouncing back towards $1.5600 at the close of trading last night but the general consensus suggests that a 1% drop in UK interest rates could bring the Pound down to the 1.4000 levels.
The UK economy contracted 0.5% in the third quarter in the official statistics released last week as the decline in housing is accompanied by a downturn in services and manufacturing, while speculation continues to mount that the Bank of England could reduce borrowing costs aggressively on November 6th.
The former chairman of the Financial Services Authority Howard Davies concurred with that sentiment, saying yesterday that the Bank of England may need to consider lowering its benchmark interest rate by a full percentage point as the turmoil sweeping through financial markets shows few signs of abating.
The heightened speculation surrounding the rate announcement has continued to weigh on Sterling sentiment as the Pound declined against 14 out of the 16 most actively traded currencies, while the rising appetite for risk aversion means that the higher yielding currencies will continue to struggle as investors seek the security of the U.S Dollar and Japanese Yen.
BNP Paribas have recently altered their predictions to reflect a 100 basis point reduction and yesterday Goldman Sachs Group Inc also said that the Central Bank will bring borrowing costs down to 3.5% next month in a last ditch attempt to bring some stability and confidence back to the banking system.
The Prime Minister Gordon Brown also weighed into the argument yesterday and said that central banks around the world have the scope to reduce interest rates and even indicated in an interview with the BBC that the escalating crisis may warrant another emergency reduction this week after the UK economy contracted by the most since 1990 in the third quarter.
The deteriorating outlook of the global economy has also hurt the Euro in recent weeks as the single currency slips to a fresh two year low versus the Dollar as European stocks continue to slide and business confidence in Germany declines to the lowest level in five years.
The Ifo sentiment index showed that confidence slipped to the lowest since January 1991 as the escalating financial crisis dimmed the outlook for growth, while the report also reiterated that the German economy is struggling to recover from a second quarter contraction and that may force the ECB into action.
The Central Bank President Jean-Claude Trichet said yesterday that policy makers may consider cutting interest rates next week, less than a month after a coordinated 50 basis point reduction that has thus failed to bring stability back to the market.
In a speech in Madrid, Trichet said that he would “consider it possible that the Governing Council would decrease interest rates once again at its next meeting” but he declined to comment on the scale of the reduction.
Another remarkable week in financial markets saw the Pound plunge almost 10% against the Dollar, while the UK currency also dropped to a fresh record low versus the Euro amid stories of suspended trading on stock, hedge funds in chaos and the prospects of another coordinated round of interest rate cuts.
The fear and panic gripping global markets shows few signs of abating as traders and investors are forced to liquidate positions in equities, commodities and high-yielding currencies amid mounting evidence that the global economy was heading for a prolonged recession.
As a result, traders look set to remain on high alert over the coming days as the momentous fall in stocks combined with the uncertain trading environment continued to favour ‘defensive’ currencies like the Japanese Yen, the U.S Dollar and the Swiss Franc.
The unquenchable rise in risk aversion continued to weigh heavily on Sterling sentiment as the Pound fell below $1.5300 at one point on Friday, to record the biggest weekly decline since ‘Black Wednesday’ in 1992, while the UK currency also slipped towards 1.2200 versus the Euro amid a barrage of weakening economic reports.
Official figures on Friday showed that UK gross domestic product dropped 0.5% from the second quarter, more than double initial forecasts, and indicated that the financial crisis has heavily affected industries from banking through to construction as the economy enters its first recession since 1991.
The report from the Official of National Statistics was the catalyst for a yet another decline in UK stocks as the FTSE 100 index lost a further 5% on the session, while the Pound suffered its sharpest intraday drop against the Dollar in at least 37-years as the report supported the Prime Minister’s damning assessment on the outlook for growth.
Gordon Brown’s £500 billion injection of emergency funding, combined with the Bank of England’s 50 basis point interest rate cut has thus far done little to bring a sense of stability and calm back to the market and there are real concerns that the biggest rate reduction since 2001 has come too late to prevent a recession.
The subsequent reaction to the report may indicate that the BoE will need to implement another rate cut in November as BNP Paribas predict a full percentage point reduction from the current 4.5% and the increased appetite for lower yielding assets may see the Pound come under renewed selling pressure in the near-term.
Bank of America Corp and JP Morgan Chase & Co have both forecast a 75 basis point cut on the November 6th announcement despite the BoE not cutting by more than half a point since the Central Bank started setting interest rates after Labour came to power in 1997.
The historic level of volatility sweeping through financial markets saw the Pound trade at $1.5269 on Friday, the lowest since August 2002, before bouncing back towards $1.5900 at the close, while the Pound also came back from a record low against the Euro after declining 2.5% in just a week.
The collapse in credit markets and the worst housing slump in a generation have buffeted the government’s efforts to restore confidence to the market and the figures on Friday only weigh in to the argument that the UK economy has already entered a recession , while growth is expected to contract for the next three quarters.
The decline in Sterling was reminiscent of the moves seen in September 1992 after the then Prime Minister John Major pulled the currency out of the Exchange Rate Mechanism but Friday’s drop was the largest since 1971, when former U.S President Richard Nixon ended the global fixed exchange rate regime set up at the Bretton Woods conference at the end of the Second World War.
The so-called safe haven currencies are likely to remain the most attractive commodity to investors over the coming week as the Yen also rose 15 % in value against the Sterling last week and the increased appetite for risk aversion may see the Pound slip inevitably towards the 1.40 levels versus the Dollar.
Although the Euro took advantage of broad Sterling weakness last week, the single currency continues to look vulnerable against a basket of currencies, registering the steepest weekly loss versus the Dollar since the Euro’s introduction in 1999.
Amid a packed week of Euro-zone data, the single currency could again struggle to stem the losses with the German Ifo sentiment index expected to show confidence slipped again, while the flash estimate of consumer prices may show that inflation is trending downwards, giving policy makers the scope to continue lowering interest rates.
The U.S currency gained the most in 16-years against six of the major currencies and rallied an incredible 6% versus the Euro to touch the highest level in two years at 1.2616 as the global economic slump helped demand for the Dollar as a relative safe haven from losses in emerging markets.
The unrelenting increase in appetite for Dollar denominated assets comes despite the plunge in the U.S stock market last week as the Standard & Poor’s Index dropped 6.8% on the week, while the Dow Jones Industrial Average also fell 5.4% amid suggestions that trading would be suspended amid historic levels of volatility.
Nevertheless, the dwindling sentiment surrounding stocks has failed to curtail the Dollar’s momentum and the U.S currency may again stand firm as the Federal Reserve convenes this Wednesday and the futures market has gone from pricing in a quarter percentage point cut to look for a 50 basis point reduction.
The dollar continued to benefit from fund demand and the unwinding of highly leveraged positions during trading yesterday, hitting a 2 year high against Euro and a 5 year high against Sterling.
Sterling has deteriorated against the USD and the Euro after comments from the Governor of the Bank of England on Wednesday morning, confirmed that the UK economy was probably entering its first recession in 16 years. It steadied overnight but with key support at $1.63 and then $1.61.34 giving way, speculation has increased that the Bank of England will take aggressive action on interest rates, in order to shore up the economy.
The Euro and Sterling remain under pressure versus the US dollar this morning, as investor sentiment stays fragile in the wake of further losses on Wall Street. European stocks are expected to fall again today following the performance of US and Asian stocks in the overnight session. The dollar broke through the $1.60 level versus Sterling overnight and is challenging short-term support at $1.5850. Sterling has also weakened against the Euro, which has broken long-term support at 1.2500 and looks to be heading lower.
According to Futures trading, The Federal Reserve Open Market Committee are expected to reduce the benchmark Federal funds rate by half a point next week to 1% (the lowest since May 2004.) If the Fed. opt to take U.S. interest rates below 1%, this action could take the focus away from the main rate, and turn the focus towards alternative measures. These measures may include increasing its holdings of mortgage bonds to lower costs for homebuyers and purchasing securities directly from the Treasury in order to pump more cash into the economy.
Banks worldwide are shelving deals and cutting jobs as the unprecedented turmoil in credit markets spreads and spurs concern the global economy may fall into a recession. Goldman Sachs Group Inc., the only firm among Wall Street’s five biggest to remain profitable through the credit crisis, have confirmed that they will shed about 3,200 workers, or 10% of its staff, as the revenue outlook worsens – These cuts add to more than 130,000 jobs eliminated in the financial industry since mid-2007.
Reports confirmed yesterday morning that Retail sales in the U.K. fell during the month of September as rising unemployment and the threat of a recession has prompted British shoppers to curb spending. French Business confidence fell to the lowest in almost 15-years as the global credit crisis worsened, threatening to deepen a likely recession in the euro region’s second-largest economy.
Persian Gulf shares declined for a second day following world markets as investors fear a global economic slump will damp profits and as falling oil prices reduce the region’s export earnings. Crude oil fell, giving up earlier gains, after Saudi Arabia failed to endorse Iran’s call for an OPEC production cut when the group meets tomorrow.
South Africa’s Rand traded near its weakest since March 2002, as commodity prices and stocks fell, stoking concern a global recession will hurt exports of precious metals and cut purchases of the nation’s assets.
Data released 24th October 2008
08.30 ITALY Consumer Confidence 08.30 ITALY Business Confidence (October) 09.00 EU-15: Flash PMI 09:00 EU-15 Manufacturing & Services (October) 09:00 U.K GDP (Q3) 11:00 IRELAND External Trade Balance (August) 15.00 UNITED STATES Existing Home Sales (September)
Conditions on money markets continue to thaw, with USD short term funding costs falling further in Asia on the back of the latest initiatives from central banks and governments aimed at increasing liquidity.
The Federal Reserve have confirmed they will raise the interest rate it pays banks for the excess cash they keep on deposit, in order for them to keep pumping funds into the financial system without affecting the central bank’s monetary policy. Fed. officials acted after the initial rate they set on 6th October failed to keep the benchmark U.S. overnight interest rate close to the target set by policy makers.
The previous rate was 0.75% below the target. The Chairman of the Federal Reserve, Ben Bernanke wants to ensure that his efforts to flood the financial system with cash doesn’t interfere with the policy rate. They started paying interest on reserves this month after gaining authorization under the financial-rescue bill passed by Congress.
The improvement in credit markets, however, has done little to ease concerns about the outlook for the global economy or encourage any move out of defensive currencies. The Euro has fallen to its lowest level for over a 18-months versus the USD as support at $1.30 and then $1.28 gave way. Further losses are seen, with the single currency also pressured against the yen as it continues to be benefit from its safe haven status.
Sterling deteriorated further against the Euro and reached a 5-year low against the Dollar, after Bank of England minutes released yesterday morning confirmed that policy makers voted unanimously to reduce UK interest rates by half a percentage point this month.
The Bank of England, European Central Bank, the U.S. Federal Reserve, Bank of Canada and Sweden’s Risbank all unexpectedly reduced interest rates in an emergency meeting on 8th October – this was an unprecedented coordinated effort to ease the economic effects of the worst financial crisis since the Great Depression.
The committee noted that the recent global reduction in interest rates could not be expected to resolve the current problems within financial markets and that a significant increase in the capital sector would be required.
The nine-member Monetary Policy Committee (MPC) – led by Governor Mervyn King, confirmed that the U.K. economy is expected to sink into recession in 2009. He also confirmed that House prices in the U.K. are likely to continue to fall.
Policy makers cited lower oil prices, the weakening economy and rising unemployment as reasons why the current 5.2 percent inflation, more than double the 2 percent target, was unlikely to become embedded in the economy through faster wage growth.
There is now increased speculation that the Bank of England are likely to follow this month’s emergency interest-rate reduction with another potential half-point cut at the next scheduled meeting on 6th November.
Hungary opted to raise its benchmark interest rate by 3 percentage points yesterday afternoon. (the biggest increase in five years) and pledged measures to shore up the economy after steps to halt the flight of investors failed. Stocks, bonds and the Forint have plunged in the past two weeks on concern that the country will face difficulties in financing its current account and budget deficits with in the face of the global credit freeze. This has put the Forint under increased pressure, prompting the Magyar Nemzeti Bank to lift the two-week deposit rate to 11.5% in an emergency move.
New Zealand opted to reduce interest rates by a record 1 percentage point to 6.5% during the early hours of this morning. This is the largest reduction in interest rates since the Reserve Bank began using the official cash rate in 1999. There is speculation that the Reserve Bank may need to reduce interest rates again within the short-term, however, it is unlikely that any future reduction will be as aggressive.
Sweden’s Riksbank also opted to reduce interest rates by half a percentage point to 3.75% this morning (the second cut in two weeks.) Sweden pledged 1.5 trillion kronor ($192 billion) to guarantee loans this week to help reduce bank borrowing costs and revive lending in the financial system. The Riksbank are expected to reduce interest rates by up to half a percentage point again in the near future.
Written By Hannah Wilson
Data released 23rd October 2008:
02:00 NEW ZEALAND RBNZ Official Cash Rate Announcement 00.50 JAPAN Trade Balance (September) 07.45 FRANCE Consumer Spending (September) 07.50 FRANCE Business Climate (October) 08.30 SWEDEN Riksbank Interest Rate Announcement 09.00 EU-15 Current Account (August) 09.30 U.K. Retail Sales (September) 10.00 EU-15 Industrial Orders (August) 13.30 UNITED STATES Jobless Claims (w/e 17th October) 14.00 BELGIUM Belgian Business Confidence (October)
Both the Euro and Sterling came under strong selling pressure versus the dollar over yesterday’s trading session and continued to fall overnight after strong demand for the U.S. currency to settle funding needs has outweighed recent signs of an easing of conditions within credit markets. The situation has been exaccerbated overnight due to comments made by Mervyn King, Governor of the Bank of England, that the UK economy is likely to sink into recession in 2009. These economic fears have sent the pound plunging to a five-year low against the dollar. Yesterday afternoon the dollar gained strength against the Euro & Sterling after reports confirmed that the Federal Reserve will help finance purchases of up to $600 billion in assets from money-market mutual funds oiled by redemptions from investors seeking the safety of government debt.
The new effort is called the Money Market Investor Funding Facility. JPMorgan Chase & Co. will run the five special units that will buy certificates of deposit, bank notes and commercial paper with a remaining maturity of 90 days or less. Each unit will buy paper from up to 10 separate issuers. The Federal Reserve are expected to lend up to $540 billion to the five funds – which are designed to help improve the liquidity position of money market investors.
The Federal Reserve itself is due to meet next week, amid speculation that it is likely to reduce interest rates again in a further bid to shore up the economy. The London interbank offered rate, (also known as the Libor rate) which banks charge each other for 3-month loans in Euros dropped 3 basis points to 4.96 percent yesterday -as governments stepped up efforts to boost bank balance sheets and policy makers offered cash to revive lending. The Libor rate fell to the lowest level since 12th September, which was the Friday before Lehman Brothers Holdings Inc. failed. The overnight dollar rate slid 23 basis points to 1.28% – which is below the Federal Reserve’s target for the first time since 3rd October 2008.
France are due to purchase subordinated debt from banks including BNP Paribas SA and Societe Generale SA to help shore up capital. European governments have led the U.S. in efforts to recapitalize banks and thaw credit markets. Britain, France, Germany, Spain and the Netherlands are among countries that pledged more than 2 trillion Euros ($2.65 trillion) to guarantee bank loans and take stakes in lenders. U.S. Treasury Secretary, Henry Paulson who at first rejected calls to invest directly in financial companies, now plans to spend $250 billion buying equity in banks.
News released yesterday afternoon confirmed that the Icelandic government is extremely close to securing a rescue deal with the International Monetary Fund which may also include financial help from Nordic neighbors and Japan. The fund is preparing a plan to present to the government. There is speculation that the rescue could amount to $6 billion.
Iceland is seeking aid from the IMF and Nordic countries after the collapse of its banking system had frozen its foreign-exchange market – making it much harder for importers to finance their purchases. Glitnir Bank h.f., Landsbanki Islands h.f. and Kaupthing Bank h.f. imploded with debts totalling $61 billion, (12x the size of their economy)
The yen has risen against the Euro and the Australian dollar on speculation that central banks around the world are likely to reduce interest rates again, spurring investors to sell higher-yielding assets funded in Japan. The yen gained the most against the Australian dollar after the Reserve Bank of Australia confirmed that they had a “strong economic case” for reducing interest rates on 7th October – this has fueled expectations for another interest rate reduction.
The Bank of Canada reduced its main interest rate by a quarter of a point yesterday afternoon, less than economists predicted, stating that it will probably need to reduce interest rates again in the near future. The credit squeeze spurred by the subprime mortgage meltdown is sapping demand for Canadian shipments of automobiles and lumber to the United States (Canada’s main export market).
The Reserve Bank of New Zealand are expected to reduce their benchmark interest rate by 1 percentage point to 6.5% during its next interest rate decision on 23rd October.
Signs of an easing in stress in credit market and a positive close from Asian stocks on Sunday saw the yen fall back against the Euro and high yielding currencies like the AUD and NZD as investor sentiment picked up a little.
Market conditions and sentiment are still fragile. Fears of a global recession are keeping investors on edge.
South Korea has joined the list of counties announcing steps to try and stabilise its markets, which brought some relief to its battered currency. There are also promises of a global financial summit, to be held in the US after the presidential elections in early November.
Money-market rates fell, extending last week’s declines, as governments bailed out banks and policy makers intensified efforts to combat the credit freeze in lending with cash injections.
The London interbank offered rate, or Libor rate, which is the rate that banks charge each other for three-month loans in dollars, slid 36 basis points to 4.06% today (the biggest drop in nine months) The overnight dollar rate declined 16 basis points to 1.51% (the lowest level in more than four years) The three-month rate for euros fell. The Libor-OIS spread, a measure of cash availability, dropped below 300 basis points for the first time in almost two weeks.
Policy makers have redoubled efforts to end the credit crunch that’s threatening to tip the global economy into a recession. Interbank lending evaporated after Lehman Brothers Holdings Inc. filed for bankruptcy on September 15th – shattering confidence among lenders and sending borrowing costs to records. ING, the biggest Dutch financial-services firm, will get a 10 billion-euro ($13.4 billion) lifeline from the Dutch government after mounting credit-market losses drove the stock to a 13-year low. The government will buy non-voting preferred shares and appoint two representatives to the board, the Amsterdam-based company confirmed yesterday.
European Central Bank President Jean-Claude Trichett said policy makers have put banks “on the path” to recovery by pumping unprecedented amounts of cash into money markets. “I expect the banks to normalize their relationships, meaning that they start lending to each other and that they lend to their clients,” Trichet said in an interview on French radio RTL yesterday. He also mentioned that the banking system is “on the path to normalization,”
In a meeting with the House of Representatives buget commitee yesterday, Federal Reserve chairman Ben Bernanke, confirmed that more government spending may be needed to combat economic weakness. The dollar strengthened against Sterling on the back of this announcement.
The Federal Reserve lowered its benchmark interest rate by half a percentage point on 8th October to 1.5% in an unprecedented co-ordinated action with other central banks.
As the credit crisis intensified in early September, the Federal Reserve took unprecedented actions, which included rescuing insurer Amercian International Group Inc. (AIG) with an $85 billion loan, later supplemented by $38 billion of additional credit; They backed legislation to spend up to $700 billion on recapitalizing banks and buying distressed assets, and setting up a short-term funding backstop for U.S. companies through commercial-paper purchases.
There is now growing speculation amongst traders that the Federal Reserve are likely to reduce interest rates again in the lead up or during the next Federal Open Market Commitee meeting on 28-29th October. Futures markets are currently predicting a 100% chance of a quarter point reduction and a 46% chance of another half point reduction.
OPEC, the supplier of more than 40% of the world’s oil, plans to cut output for the first time in almost two years, as the worst financial crisis since the 1930s sends crude toward $62.29 a barrel.
Reports confirmed that OPEC is likely to cut by a million barrels a day on 24th October, and will need to announce further reductions to prevent prices falling below $60 a barrel,
The UK economy has “deteriorated dramatically” during the past three months, and top forecasters have suggested that the U.K. economy is already in a recession.
Reports yesterday morning, confirmed that Britain has posted its biggest six-month budget deficit since World War II. The 37.6 Billion-pound short-fall ($65 billion) in the fiscal first half through September, was the largest since records began in 1946. With the U.K. economy facing its first full-year contraction since 1991, Chancellor of the Exchequer Alistair Darling pledged to concentrate on job-creating projects, such as building work. However economists have stated that Tax increases and spending restraint will eventually be needed to fill the hole in the public finances.
The number of people out of work in the U.K. rose sharply in the three months to August by 164,000 compared with the previous quarter -the biggest rise in U.K unemployement for 17 years.
Volatility in the Foreign Exchange markets has been exceptionally high over recent times with unprecedented events in the financial world significantly altering the outlook for major currency pairs.
Although the financial crisis originated in the United States, the dollar has appreciated sharply from the historical lows seen in mid July. However, in an environment of heightened risk aversion, it is the Japanese yen that has proved to be the (major) currency of choice as investors seek refuge from what is now a global financial crisis.
Where FX markets go to from here, will very much depend on whether financial market conditions begin to show real signs of improvement. However, it is likely to be some time before we seen a return to normal market functionality – with an uncertain trading environment continuing to favour defensive currencies like the yen, the US dollar and, indeed, the Swiss franc.
Despite the announcement of an array of measures from governments and central banks aimed at restoring confidence and improving liquidity, market sentiment remains extremely fragile as the focus begins to switch from the financial crisis itself, to longer term implications for the global economy. The schedule for economic data is relatively light this week, Therefore traders will continue to look towards Wall Street for direction.
In the United States, the focus this week will fall on the housing market, with existing home sales for September due for release. Weekly Jobless claims will also be noted during the build-up towards the non-farm payroll report for October.
Federal Reserve chairman, Ben Bernanke is due to testify to the House Banking Committee on Wednesday and comments will be closely watched.
In the Euro-zone, the main economic data release this week is likely to be the flash PMI readings for October, which are expected to show that both the manufacturing and services indices slipping even further below the key 50 level.
Business and consumer confidence surveys from Italy and France are also forecasted to make depressing reading. German inflationary data however, is expected to confirm an easing of price pressure after lower energy costs and a deceleration in activity impact.
A number of ECB speakers are scheduled this week and comments will be closely watched for any indication of future policy.
In the UK, the focus will be on the release of the minutes of the last BoE meeting, which saw rates reduced by 0.50% to 4.5%
The first estimate of Q3 GDP will be closely watched and is forecasted to show growth contracting by 0.2% (the first fall in activity since Q2-1992 ) UK retail sales for the month of September is also due to be released, along with CBI manufacturing orders report for October.
Data released 20th October:
07:00 GERMANY PPI (September) 09:30 U.K. PSNCR (September 15:00 U.S. Leading indicators (September
Every effort is made to ensure the accuracy of the information contained within this email, however TorFX cannot accept liability for damage caused by error, omission, or inaccuracies. Any opinions expressed are those of the author, and do not represent advice. Clients are wholly responsible for trading decisions
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