Market News

The Pound remained very weak in early trade yesterday, dropping under $1.4200 against the Dollar and falling to a low of 1.1134 versus the Euro, as escalating fears over the UK banking sector intensified, following the severe annual losses at the Royal Bank of Scotland Group Plc.

Nevertheless, confidence in the banking sector was supported to some extent by the government’s plans to provide additional protection to struggling financial institutions, effectively easing the pressure from bad loans and toxic debt in a government supported insurance scheme.

RBS Plc will put £325 billion of investments into a state insurance program and shift toxic assets to a new unit after Britain’s biggest government owned bank posted the largest loss in British history. The struggling bank will transfer roughly £540 billion of assets, including derivatives and loans on commercial and residential property to the new unit, mirroring the actions taken by Citigroup Inc in creating a ‘bad bank’.

Following the reports, the share price in RBS and Lloyds Banking Group Plc rose more than 25% in London, as the government provided a bigger guarantee than initial estimates. The Prime Minister Gordon Brown has agreed to insure the distressed banks in an attempt to boost capital that will ultimately spur lending and bolster the economy.

The steps taken by the government yesterday is the latest indication that the Chancellor Alistair Darling is closer towards nationalising UK banks, as the Treasury allows its stake in RBS Plc to climb to 84% in return for guaranteeing £325 billion in toxic assets. The government are desperate to get banks lending again as the economy suffers its worst recession since the 1980s, while Darling will also want to keep some private ownership of RBS Plc and other banks.

The renewed optimism that the banking sector will stabilise saw the Pound recover some gains against the majors, rising to a high of $1.4380 by the close of trading last night. The near-term sentiment for the Pound will be influenced strongly by the trends in domestic banking and the aggressive swings in risk appetite that saw lower U.S equities trigger modest Sterling losses in New York.

In terms of economic data, the UK home values fell by the most in at least 18-years in February, as the pessimism in the banking sector and a worsening economic climate led to a restriction in mortgage finance, according to a report from the Nationwide Building Society.

The average cost of a home in Britain fell an annual 17.6% to £147,746, the biggest drop since the monthly data began in 1991, while home values slumped 1.8% on the month amid the biggest economic contraction since 1980.

The Euro is stuck in a tight trading range against the Dollar and once again failed to break above the key resistance at $1.2810, while the single currency retraced back towards 1.1250 versus the Pound, after the EC sentiment index showed that economic confidence had slipped to the lowest level on record in February.

Tighter lending restrictions and rising unemployment is putting increased pressure on the European Central Bank to step up its response to the financial crisis. An index of consumer sentiment plunged to a reading of 65.4 this month, as lending to households and companies slowed by the most in over five years.

European retail sales declined and the jobless rate in Germany rose for a fourth straight month as the tone of yesterday’s data dashed any hope of stabilisation in the economy. The reports also increased speculation that the Central Bank will cut interest rates by 50 basis points in March, with a further protracted cut in April.

The Dollar is very susceptible to swings in risk sentiment and that is a theme that is likely to continue in the short-to-medium term but the U.S currency also came under some pressure yesterday after a barrage of weaker economic data pointed to a worsening recession.

New home sales plummeted to a record low in January, as soaring unemployment and rising foreclosures discouraged buyers, with purchases falling 10% to an annual pace of 309,000, the lowest level since the data was compiled in 1963.

Elsewhere, U.S durable goods orders declined for a sixth straight month in January, signaling that companies are slashing jobs and corporate investment, while initial jobless claims for unemployment benefits unexpectedly rose to a record high last week.
Data released 27th February.

EU 10:00 Final Harmonised Index Consumer Prices (January)

EU 10:00 Unemployment (January)

U.S 13:30 Gross Domestic Product (Q4)

U.S 13:30 Chicago PMI (February)

U.S 14:55 Michigan Sentiment (February Final)

written by Adam Solomon

The Pound declined heavily against the majors yesterday, dropping under $1.4200 versus the Dollar, while the UK currency also dropped under 1.1200 against the Euro, following reports that the revised estimate of gross domestic product in the fourth quarter showed that the recession is deepening, fuelling speculation of a further reduction in borrowing costs.

According to the report from the Office of National Statistics, the UK economy contracted at the fastest annual pace since 1980, during Margaret Thatcher’s first term as Prime Minister, as the escalating financial crisis saw consumer spending and business investment dwindle.

UK gross domestic product, in the three months through December, fell 1.5% from the third quarter, matching the preliminary estimate in January, as consumer spending declined 0.7%, the most since 1991, while fixed investment dropped 2.3%.

The Pound came under renewed selling pressure against almost all of the 16-most actively traded currencies as the report sparked an increase in risk aversion, despite the drop in GDP being marginally less than economists had anticipated, as a number retailers collapsed, including Woolworths Plc and JJB Sports Plc.

In addition, a separate gauge of the report showed that UK industrial production declined 4.5% on the quarter, up from the previous estimate of 3.9%, while manufacturing slid 5.1% and officials revised up their measure of the decline in service sector growth.

The UK economy is in the midst of the worst recession in almost thirty years and will need additional stimulus to stem the downturn and ward of the risk of deflation, according to Bank of England policy maker Andrew Sentence, while a spokesman for the Treasury said that “things are likely to get worse before they get better”.

Sentence reiterated yesterday the persistent threat of price declines, increasing the prospect of a period of deflation in the UK, a sentiment echoed by the Deputy Governor of the BoE John Gieve, who that Britain faces the risk of a decade-long depression.

Both policy makers have also emphasised the need of government stimulus to stem the slide in growth and the Chancellor Alistair Darling has ordered Northern Rock Plc to expand lending by £14 billion, in an attempt to revive credit conditions and bolster spending.

The Prime Minister Gordon Brown is expected to announce further measures this week to support struggling financial institutions, including the Royal Bank of Scotland Group Plc, who are still fighting the threat of full nationalisation. The Bank of England are expected to cut interest rates by a further 50 basis points on March 5th to another historic low of 0.5% and policy makers have signaled that they want the power to create money to help stimulate the economy.

The Pound declined almost 2% in value against the Dollar yesterday amid suggestions that the recession will intensify in the first quarter of this year but the UK currency could still be on its way to a substantial upward correction over the medium term.

EU officials are increasingly concerned that the Pound’s 23% slump against the Euro over the past year could destabilise the UK economy and policy makers must be alert to the possibility that the weakness in Sterling will just scare of foreign investors, according to Neil Mackinnon, Chief economist at ECU Group.

The Euro was unable to break above the resistance near $1.2900 against the Dollar yesterday, after Standard & Poor took the decision to downgrade Ukraine’s debt rating, further enhancing concerns over the exposure of Eastern European economies. While fears that there could be further destabilizing losses with the banking sector also undermined confidence in the Euro.

However, the single currency took advantage of broad Sterling weakness, rising almost 1% on the session, despite reports that German exports plunged in the fourth quarter of 2008, sparking the biggest contraction in the economy in almost 22-years.

Exports dropped 7.3% from the previous quarter, as corporate investment dried up and the Euro may come under further selling pressure this morning amid the release of German unemployment data, which may show that the jobless rate rose again in February, while the EC sentiment index is expected to show a further decline in confidence.

The Dollar rose against the majors yesterday as the negative tone of economic data encouraged investors to seek the security of safe haven assets. The U.S currency also found support despite reports that existing home sales unexpectedly declined in January, even as falling prices made property more affordable.

Purchases fell 5.3% to an annual rate of 4.48 million, the fewest number since 1997, signaling that the worst housing slump in two decades is showing few signs of abating. Consumer’s have been waiting for President Obama’s plans to stem foreclosures and declining home values that are at the core of the economic slump.

Data Released 26th February

U.K 07:00 Nationwide House Prices (February)

GER 09:00 Unemployment (February)

GER 07:00 Gfk Consumer Confidence (March)

EU 09:00 M3 / 3 Month Moving Average (January)

EU 10:00 EC Business Climate Index (February)

EU 10:00 EC Economic Sentiment Index (February)

- Consumer / Industrial / Services

U.S 13:30 Durable Goods Orders (January)

U.S 13:30 Initial Jobless Claims (w/e 21st February)

U.S 15:00 New Home Sales (January)

written by Adam Solomon

The Pound weakened yesterday against both the Euro and the Dollar, as the UK currency lost almost 1% in value versus its European counterpart, after UK mortgage approvals fell with banks granting just 23,376 loans for house purchases, indicating that the worsening property slump is pushing the economy deeper into a recession.

According to the report from the British Bankers’ Association, the number of new home loans was actually up from 22,416 in December, as the most aggressive cut in UK interest rates in history encouraged banks to step up lending.

House prices have fallen 17.2% from a year earlier, while mortgage approvals tumbling 43% from this stage in 2008, as the government introduces a series of new measures to revive the mortgage market, ordering Northern Rock Plc to expand lending by £14 billion.

A separate report also showed that business investment has slipped 3.9% in the fourth quarter of 2008, while the downside momentum surrounding the Pound intensified as UK stocks dropped as much as 2% on the session, creating an element of risk aversion that encouraged investors to come out of Sterling.

The FTSE 100 Index has lost 41% since the start of the year already as financial firms on a global scale notch up $1.1 trillion in credit-related losses and economies worldwide fell in to the first simultaneous recession since the end of the Second World War.

Bank of England policy maker Andrew Sentence added to the gloomy sentiment for the Pound, as he said that the UK may experience a prolonged period of deflation if the recession intensifies, adding to the case for the Central Bank to buy corporate bonds in an effort to stimulate growth.

The Bank’s monetary policy committee have unanimously agreed to ask the government for the authority to create and pump money into the banking sector, after cutting interest rates to an historic low of 1%, which has seemingly failed to halt the decline.

Speaking at the Institute of Economic Affairs, Sentence said that recent reductions in borrowing costs should begin to take affect towards the middle of the year but “the risks are still weighed to the downside at this stage.”

The most aggressive policy easing on record combined with a weaker Pound should help bring the UK out of the recession but the Bank of England’s latest estimates show that the economy will contract at an annual pace of 4% by the end of the first quarter, while inflation will slow to 0.5% by the end of 2010, as falling prices increase the risk of deflation.

The Pound may come under some pressure this morning amid the release of the revised estimates of UK gross domestic product in the three months through December.

The report will probably reveal a greater contraction in economic growth than preliminary forecasts, while the UK currency may be susceptible from comments from the BoE governor Mervyn King and MPC member David Blanchflower,, who are scheduled to address Parliament on the banking crisis.

The Euro unexpectedly made versus against the Pound yesterday, while the single currency also bounced back against the Dollar amid speculation that the European Central Bank will refrain from pursuing quantitative easing policies, despite escalating tensions over the banking sector in Eastern European nations.

In terms of economic data, the Euro was unaffected by reports from the Ifo institute in Munich, who said that its index measuring German business confidence dropped to the lowest level in 26-years in February, as the worst recession since the Second World War ravaged the financial sector, prompting companies to slash jobs and curb production.

The index actually fell to a reading of 82.6 from 83.0 in January, the worst result since November 1982, despite expectations for the index to hold steady, following the government’s decision to double the fiscal stimulus package to roughly €80 billion. While the Central Bank has given a very strong indication that the governing council will cut interest rates to a record low next month in the fleeting hope of a recovery later in the year.

Elsewhere, European industrial orders declined for a fifth straight month in December as the global slump in demand weighed heavily on export growth in the region, with orders falling 5.2% from November, marking the longest period of declines since the data was first published in 1994.

Chancellor Angela Merkel’s stimulus program includes tax cuts and infrastructure investment, amounting to nearly 1.6% of gross domestic product, making it the biggest spending boost in Europe but the Euro may come under pressure this morning as the revised details of fourth quarter economic growth in the region will probably show a worsening slump.

The Dollar declined against the majority of the majors yesterday after U.S consumer confidence collapsed in February as the Conference’s boards index dropped to the lowest level since the data began in 1967, sparking fresh concerns that the economy is heading towards a depression.

In addition, a separate report showed that U.S home values plunged again in December, with prices dropping 18.5% year-on-year in December, as banks seized real-estate and mounting foreclosures exceeded the all-time high of 2.7 million.

The Chairman of the Federal Reserve Ben Bernanke delivered his semi-annual testimony to the Senate and warned that the slump in the economy may last well into 2010. Bernanke urged policy makers to take “strong action” as the Obama administration attempts to revive confidence with a number of fiscal stimulus measures, aimed at creating jobs and helping homeowners.

Data Released 25th February

U.K 09:30 Gross Domestic Product (Q4 Revised)

GER 07:00 Gross Domestic Product (Q4 Details)

U.S 15:00 Existing Home Sales (January)

written by Adam Solomon

The Pound rallied to the highest level against the Dollar in two weeks yesterday, touching a high of $1.4650, before retreating back under $1.4500 at the close of the European session, while the UK currency also advanced against the Yen and the Euro amid speculation that banks are stepping up efforts to shore up their finances.

With the fundamental lack of economic data released, the focus switched back towards global stock markets and UK banking stocks gained after the Royal Bank of Scotland Group Plc released a statement, saying that it plans to cut costs by over £1 billion.

The UK’s largest state controlled lender plans to split itself into two units and will reduce investment banking, while the Wall Street Journal reported that the U.S government may increase its holding in Citigroup Inc as the FTSE 100 Index jumped as much as 4.5% in early trade.

The buoyant mood in equity markets and the renewed appetite for risk sentiment drove the Pound higher against the majors with the UK currency touching a high of 1.1454 against the Euro. However, the Pound’s resilience will be surely be tested later this week, before a report that may show the UK economy contracted in the fourth quarter, increasing the likelihood for a further reduction in borrowing costs.

The fourth quarter estimate for UK gross domestic product will probably show that the economy contracted 1.6% in the three months through December as the financial crisis intensified. However, the Pound may receive a boost should the government announce plans this week to insure banks against the losses on their assets.

Economists at Credit Suisse Group AG are speculating that the Pound could reach $1.4900 against the Dollar over the coming weeks but the tentative movement in global stocks could easily reduce the allure of Sterling. Dollar and Euro buyers would be well placed to take advantage of the current upside momentum or at the very least place a stop order in the market to protect against a possible retracement.

The Pound may come under some pressure as a report from the Confederation of British Industry may provide further evidence of the pessimism surrounding the retail sector, while UK homebuilders may announce a further £1.63 billon if writedowns to land holdings this year after falling prices all but wiped out profit margins.

The Euro was unable to sustain the recent gains made against the Dollar and weakened substantially during the European session yesterday, dropping a low of 1.2700 yesterday, as the single currency was undermined following comments from the ECB Chairman Jean-Claude Trichet, who said that the Euro-zone banking system was under severe strain.

His comments will reinforce concerns surrounding the prospect of an economic recovery in the region and the Euro may come under further selling pressure today amid the release of the German Ifo sentiment index this morning.

The index of business confidence in Europe’s largest economy is expected to remain unchanged in February amid the government’s stimulus program and interest rate cuts that have thus far failed to bolster sentiment, as lawmakers agreed last week to more than the double the fiscal package to roughly €80 billion.

The Dollar declined heavily against the Pound yesterday as global stocks rallied higher, while the U.S currency may come under further pressure today amid the release of the S&P;/ Case Shiller index of house prices, which will probably show that prices declined 18.3% year-on-year in December.

The severity of the housing slump has pushed the U.S economy further into a recession and the Dollar may struggle to recover as the report will show the biggest annual decline since records began in 2001, while a separate report may show that U.S consumer confidence slipped to a reading of 35.2 in February.

Elsewhere, the chairman of the Federal Reserve Ben Bernanke is poised to deliver his semi-annual testimony to Congress this afternoon and economists will look to assess his stance on possible moves towards buying government debt and long-term inflation targets.

Data Released 24th February

U.K 11:00 CBI Distributive Trades Survey (February)

EU 10:00 Industrial Orders (December)

GER 09:00 Ifo Index (February)

U.S 14:00 Case Shiller House Prices (December)

U.S 15:00 Consumer Confidence (February)

written by Adam Solomon

Following on from last week, the Pound declined for a second week against the Dollar as the FTSE 100 Index of equities dropped more than 6% by Friday, increasing demand for the U.S currency as a haven. While UK home repossessions rose to a 12-year high and the Bank of England Deputy Governor John Gieve said that Britain is threatened with a decade long recession.

Bank’s took possession of 40,000 UK homes in 2008, up 54% from the previous year and the report from the Council of Mortgage Lenders also showed that the total will reach 75,000 this year, the highest number since 1991, as homeowners struggle to cope with the credit crisis, despite the most aggressive policy easing in history.

The Bank of England have slashed interest rates from 5% in October to a record low of 1% in February in a vain attempt to prevent the recession from deepening and will probably cut by another 50 basis points in March.

Gieve also indicated that the Central Bank will look at less conventional techniques to revive growth and have purchased £340 million in commercial paper during the first week of operations for its asset-purchase facility.

The commercial paper market is used by companies to cover day-to-day costs like rent and UK government bonds rallied on Friday as the fall in the stock market increased demand for the relative security of fixed-income debt.

In terms of economic data, the Pound found some support on Friday after a report from the Office of National Statistics showed that UK retail sales unexpectedly rose in January as companies slashed prices, supplementing the effects of rising job losses and a deepening economic slump.

Sales climbed 0.7% after a surprising 1.7% increase in December but economists seemed susceptible of the report and questioned the reliability of the data after the economy crumbled under the weight of the worst contraction since 1980, while retailers like Woolworths Plc closed its doors.

Elsewhere, the Prime Minister Gordon Brown urged banks to adopt a more realistic method of lending as they struggle to cope with the financial crisis and look to rebuild balance sheets with the help of taxpayers’ money.

The Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc are both part-owned by the tax payer and have asked the government to insure nearly £500 billion of assets as part of the Treasury’s plan to boost lending.

While Brown said that “we do want to see the reinvention of the traditional savings and mortgages bank in Britain, for loans to be made on prudent and careful terms, not just to people with large deposits.”

There is a strong degree of risk aversion creeping back into the market as policy makers fight to protect the UK economy from the “serious risk” of a depression, like that suffered by Japan in the 1990s. Lee Hardman, a currency strategist at Bank of Tokyo Mitsubishsi said that “any king of recovery in the Pound will look futile.”

The UK currency fell back towards 1.1250 against the Euro on Friday and the Pound may come under further selling pressure as data released this week includes the CBI distributive trades survey, Nationwide house prices and consumer confidence. All of which are expected to to show sharp falls from the already depressed levels, while the revised estimates of UK gross domestic product will point to a worsening slump in growth.

The Euro slumped to the lowest level against the Dollar in three months, while the single currency pulled back some gains versus the Pound, despite speculation that the financial turmoil in eastern Europe may quicken the economic downturn in the 16 nations that use the Euro.

Moody’s Investors Service exacerbated the negative sentiment for the Euro, saying that the credit ratings of Austrian, Swedish and other banks with subsidiaries in eastern Europe may be cut as economies in the region deteriorate.

The Euro subsequently declined 1.7% against the Dollar but the single currency recovered some of the losses after the German finance minister Peer Steinbrueck told reporters the following day that the larger nations in the Euro-zone would act should countries face problems and strongly rebuked any speculation of a break-up in the currency.

European Central Bank policy maker Lorenzo Bini Smaghi said that European Union rules will permit the EU to act as whole in helping member states in “economic difficulty”. However, his comments are in contrast to a recent statement from his colleague Juergen Stark, who said that EU states can’t be responsible for the debt liability of other member nations.

European manufacturing and service industries unexpectedly contracted at the fastest pace on record in February as the purchasing managers’ index dropped to a report of 36.2, despite forecasts of a more modest decline towards 38.5, and the ECB will cut its benchmark lending rate below 2.0% in March, in an attempt to revive sentiment.

As the element of risk aversion stalks the market, the Dollar and the Japanese Yen advanced against the majors amid fresh concerns that the worsening losses at financial firms will increase demand for havens. Global stocks continued to decline as both Citigroup Inc and Bank of America Corp slumped to the lowest levels in over 18-years.

The Dollar is almost completely susceptible to swings in risk sentiment and the U.S currency may decline should equity markets rally this week. While the tone of economic data still points to a worsening recession as new home sales probably sank to a record low in January and durable goods orders declined for a sixth straight month.

Data Released 23rd February

No Data of Significance

written by Adam Solomon

The Pound continued to make gains against the Euro yesterday, while the UK currency also advanced by the most in a week versus the Dollar, after UK stocks rallied for the first time in five days, spurring demand for riskier assets.

The correlation between the Pound and aggressive swings in risk sentiment continues to dominate the market with UK banking stocks rallying, as gilts fell and BNP Paribas SA said that it will be profitable this year, reducing demand for fixed-income assets.

The revival in global stocks is supporting the Pound in the near-term and that trend may continue amid speculation that the downward move against the majors was over exaggerated and all of the bad news for Sterling has already been priced into the market.

The Pound subsequently rallied to a high of $1.4448 versus the Dollar before dropping back towards $1.4200 at the close of trading last night, but investors are still anticipating a move towards $1.4600 by the end of the third quarter.

The increased demand for British assets may continue to rise as investors take advantage of a weaker Pound, which has lost 23% in value against the Euro over the past year. While the government’s efforts to revive the economy may actually work in bringing the UK out of the worst recession in decades.

The pro-active nature of the Bank of England and the aggressive cuts in UK interest rates since October is in contrast to the European Central Bank’s stance on monetary policy. The Pound is rallying against the Euro on speculation that the economic recovery in the UK will be quicker than in the Euro-zone.

Nevertheless, the BoE has publicly stated that the impact of monetary easing is limited. Policy makers have sought government approval to create money and purchase commercial paper that may increase demand for corporate bonds denominated in Pound as appose to Euros.

Elsewhere, the Pound relinquished much of the earlier gains against the Dollar following reports that Britain had a £3.3 billion budget surplus in January, the smallest for the month in 14-years, as the financial crisis curtailed bank profits and the recession deepened.

The surplus compares with £13.9 billion a year earlier and the figures highlight the damage inflicted by the financial crisis as the Prime Minister Gordon Brown faces the biggest budget deficit since modern records began in 1970.

In terms of economic data, the focus this morning will fall on the release of the UK retail sales numbers for January and the report from the Office of National Statistics is expected to show that sales declined 0.1% on the month, as consumer’s rein in spending and unemployment rises.

The Euro rallied from near the lowest level in three months against the Dollar as speculation eased that Eastern European banking losses will deepen regional turmoil. The single currency rebounded for the first time in four days after Goldman Sachs Group Inc said that the Euro will increase more than 6% against the Dollar to $1.3500 over the coming weeks.

The Euro lost 1.7% in value against the Dollar to trade at a low of $1.2513 on Tuesday, following reports that Moody’s Investors Service raised concerns that the financial turmoil in periphery European states like the Ukraine and Poland may slow growth in the countries that use the single currency.

There is renewed optimism for the Euro amid speculation that the European Union will bail out member states in financial turmoil and there is a reduced probability of an economic break-up, which means that countries are less likely to defect away from the Euro.

The Dollar came under pressure against the majors yesterday as global stocks rallied for the first time this week, while the worsening tone of economic data pointed to a deepening recession. The Philly Fed Index showed that manufacturing output in the Philadelphia region contracted in February at the fastest pace in over 18-years.

Employment sales plummeted to the lowest level on record as the economic index dropped to a record of minus 41.3 this month, lower than initial estimates, while U.S producer prices climbed unexpectedly in January as companies tried to boost earning at the start of the year, amid weakening demand.

Data Released 19th February

U.K 09:30 Retail Sales (January)

EU 08:58 Flash PMI – Composite (February)

- Manufacturing

- Services PMI

U.S 13:30 Consumer Price Index (January)

- Ex Food & Energy

U.S 13:30 Real Earnings (January)

written by Adam Solomon