In the wake of Barack Obama’s history victory in the U.S Presidential Election, global stocks and commodity markets retreated for the first time in seven days after disappointing earnings growth overshadowed speculation that the new President elect will boost the U.S economy with a stimulus package.
UK stocks fell for the first time in seven days amid concerns that the new U.S administration won’t be able to avert a global economic slowdown and the FTSE 100 Index lost 2.3% on the session as the feel good factor from Obama’s victory is unlikely to filter through to struggling financial markets.
Nevertheless, the Pound rallied against the majors and made unlikely gains against the Dollar, rising for a second day against its U.S counterpart, but falling back under 1.2300 versus the Euro at the close of trading last night despite suggestions that a cut in UK interest rates will bolster the economy that hangs in the grip of a recession.
Investors widely expect the Bank’s monetary policy committee to lower the benchmark lending rate by a further 50 basis points this lunchtime and the Pound has been under an increasing amount of pressure following speculation of a greater percentage cut.
According to a Credit Suisse Group AG index of probability, based on overnight indexed swap rates, policy makers could go to 75 basis points in an unprecedented action to relieve an economy that has been battered by the global credit crisis.
However, that proactive attitude goes against the recent actions of the Bank of England and the speculation over a larger cut could see the Pound rally in the aftermath of today’s announcement as an element of risk appetite returns to the market.
The BoE may ignore pressures for a 75 basis point reduction and take into account the rigidly high rate of consumer price inflation, which still remains more than double the government’s 2.0% target, even as the price of raw materials declines from the all time record highs.
The Pound rose to a high of $1.6196 on the session while the UK currency also registered gains against the Australian and New Zealand Dollar despite separate reports that UK factory production extended the worst streak since the early years of Margaret Thatcher’s administration.
Manufacturing output slumped a further 0.8% in September to record the biggest drop in almost two years and the time production declined for seven consecutive months was during the recession of 1980.
Elsewhere, a report from the Chartered Institute of Purchasing and Supply showed that UK service sector growth contracted by the most since 1996 with the index falling to the lowest level in its 12-year history as the economy headed into possibly the worst recession since the end of the Second World War.
The degree of instability in the UK banking system is now filtering through to the broader economy and the dire tone of the reports released yesterday will only put further pressure on the Bank of England to step up an aggressive easing in monetary policy.
The Euro looks poised to revisit the strong resistance around the all time record low of 1.2218 versus the Pound, while the single currency has also bounced back strongly versus the Dollar amid speculation that an ECB rate cut this afternoon will bolster the broader economy.
The European Central Bank have all but confirmed that the governing council, led by the Chairman Jean-Claude Trichet, will slash borrowing costs by a further 50 basis points this month in order to provide some relief to banks and stimulate the economy.
It was difficult to ignore the jubilation surrounding Barack Obama’s election victory yesterday but there was also widespread concern on Wall Street that his appointment as President may start another round of profound Dollar weakness.
Historically, a Democratic government tends to allow the U.S currency to decline in order to help the economy but the new administration could also put renewed pressure on the Japanese Yen and Chinese Yuan to appreciate in order to help the U.S economic recovery.
Obama inherits an economy facing the worst financial crisis since the Great Depression in the 1930s and the Federal Reserve has already cut interest rates by 325 basis points over the past 14 months, while injecting $700 billion in emergency funding to bailout struggling financial institutions.
U.S stocks tumbled and the Dollar declined against the majority of the majors as a contraction in services and further slump in company job losses increased speculation that Fed policy makers will cut interest rates to just 0.5% next month in a last ditch attempt to end the current crisis.
The Institute of Supply Management’s non-manufacturing index, which covers almost 90% of U.S gross domestic product, fell below economists’ forecasts to a reading of 44.4 in October as the record drop was exacerbated by tighter credit conditions and slowing consumer spending.
The dwindling consumer sentiment and economic deterioration was the catalyst in the wave of discontent with Republican rule that eventually swept Barack Obama to victory in the U.S Presidential election yesterday but spending by consumers and businesses will continue to decline over the coming months.
Data Released 6th November
U.K 00:01 NIESR GDP Estimate (3 Mths to October)
U.K 12:00 BoE Interest Rate Announcement
GER 11:00 Industrial Orders (September)
EU 12:45 ECB Interest Rate Announcement
EU 13:30 ECB Press Conference
U.S 13:30 Initial Jobless Claims (w/e 31st October)
U.S 13:30 Labour Costs (Q3)
- Productivity
written by Adam Solomon
Related posts:
- The Euro rises to a historic high versus the Dollar and also makes strong gains against the Pound
- The Pound may continue to make gains against the Dollar ahead of a packed week of UK economic reports
- The Dollar recoups some of the gains against the Euro following the unusual volatility surrounding the Thanksgiving Holiday
- The Pound makes gains against the majors as UK economic growth accelerates 0.7% in the three months to October
- The Euro was given a timely boost yesterday as Business Confidence in Germany jumps to the highest level in 15-years
