BOE GIEVE PROPOSES POSSIBLE UK JAPAN-STYLE RECESSION
There was a distinct scent of risk hunger in the air for global money markets yesterday, weakening the Dollar and the Yen and boosting higher risk currencies including the Euro and the Pound. As anticipated, GBP/USD moved upwards to the low 1.44 region before pulling back to settle in the 1.43s with GBP/EUR also testing the mid 1.13 level before pulling back to the high 1.12 area. This came largely off the back of short Dollar positions as investors pulled funds out of the currency to make some tentative emerging market and Eurozone purchases, although a cutting of speculation on a rising Dollar also had a large part to play in the moves which brought EUR/USD back to 1.27 once again.
What prompted the above was a reaction to a bundle of economic data from the US which attested to a growth in money supply in the region over the last month. This information, largely comprised of US leading economic indicators and Producer Price Indices, which were both out at much better than expected, could potentially be taken as one of the first faint glows of a return to healthy inflation later in the year as the money supply is boosted and consumers begin to resume normal levels of spending. Bearing in mind that this is no means a given, the market has only reacted very cautiously, but there does seem to be a sense of some optimism out there that, at the very least, the Fed and US Government monetary and fiscal measures of the last months are having some positive effect in destroying the brunt of deflation.
Stability also the name of the game Sterling-side yesterday as a few pieces of data vied to wrestle the Pound one way and the other, leaving the currency pretty undecided overall. On the one hand, Government data showed a truly terrible Public Sector Surplus over the last months of 3.3bn Pounds, in the month of the year that is meant to net the most money from the taxpayer, whilst on the other, figures on UK corporate debt showed a decent decline in yields over the last month. In laymen’s terms, this has broadly been taken by the market as an indication that the Bank of England’s purchase of commercial paper over the last month is working in lowering borrowing costs where liquidity is needed most. The Public Sector figure is extremely disconcerting though.
Today is likely to see GBP/USD pull right back in response to end of the week and year-end corporate Dollar demand. GBP/EUR will likely benefit from EUR/USD weakness although the currency pair can be expected to see an upside of around 1.1350 thanks to comments from John Gieve of the Bank of England last night, which, in his last ever address as a policymaker, highlighted his view that the UK is potentially facing the risk of a decade-long ‘Japan-style’ recession. Also expect volatility this morning around UK Retail Sales which, in combination with some Eurozone manufacturing data will probably lead to quite a stagnant Sterling market with GBP/USD moving around the 1.42-1.43 mark.
Raphaels Bank CFX Team
0800 587 8722
cfx@raphael.co.uk
www.raphaelsbank.com/cfx
This newsletter is the personal view of Raphaels Bank and nothing herein should be construed as a recommendation or advice. The Bank accepts no responsibility for the correctness or otherwise of any matters contained herein.
Authorised and Regulated by the Financial Services Authority.
Friday, 20 February 2009
Thursday, 19 February 2009
POUND HOLDS FIRM DESPITE BOE PROPHESYING DOOM
POUND HOLDS FIRM DESPITE BOE PROPHESYING DOOM
UK demand for gilts surged yesterday with yields for ten-year Treasuries dropping to multi-year lows amidst news from the Bank of England minutes that Mervyn King has his finger firmly on the button for quantitative means in stimulating spending, possibly for as early as next month. Despite the fact that money was dragged away from equities and into Government debt over the plans, which will involve the Bank making purchases of a variety of market assets, international demand for UK debt actually continued to wane. Investors still take the view that the risk is certainly there for the actual value of the Pound to be hugely eroded in future in response to these highly exotic and unprecedented measures. Whilst this scenario is unlikely to materialise, in a situation where prices are falling and the interest rate mechanism is either broken or not powerful to stimulate demand on its own, the use of money creation certainly represents a potentially lethal dose of medication.
Fortunately for the Pound though, despite the clear negativity of the BOE minutes yesterday in terms of deflationary risk to the UK economy, the fact that financial authorities seem to be taking the bull by the proverbial horns is still providing some good girding. This is especially the case with GBP/EUR, which, despite seeing some downside around the 1.12 mark yesterday, finished the day well up around 1.1330. As we know though, this is mostly thanks to the prevailing view amongst investors at the moment that, despite an elevated base rate, all is not well in Europe. A host of Eastern European Banks and Institutions which are mainly owned and controlled by Western Europe, plus huge bond and credit default spreads on many European countries now, indicative of collapsing GDP and crumbling fiscal health, can be thanked for this.
All in all then, yesterday was a grim day for the UK, but, set in the relative context of the global outlook, Sterling still looks nice and stable. The hotly contested ‘quantitative easing’ measures may be rather shocking and scary for the markets, but, at the end of the day, this action could well be a gamble which pays off in relation to the rest of the world once economic recovery time kicks in. It is however still worth noting that there remains some considerable risk for GBP versus the traditional funding and reserve currencies. This largely explains a falling GBP/USD yesterday which pulled off in response to a falling short-term market risk appetite and a strengthened Dollar.
Today can expect to see some major indices equity interest in the morning, which, alongside cutting of short Sterling positions, should pull the Pound up against both the Euro and the Dollar. Expect an upside of 1.14 on GBP/EUR and 1.44 on GBP/USD. UK Public borrowing figures at 930 GMT will likely halt any greater gains on these pairs though. US Unemployment claims will probably also serve to strengthen the Dollar this afternoon, bringing GBP/USD back down but supporting GBP/EUR.
Raphaels Bank CFX Team
0800 587 8722
cfx@raphael.co.uk
www.raphaelsbank.com/cfx
This newsletter is the personal view of Raphaels Bank and nothing herein should be construed as a recommendation or advice. The Bank accepts no responsibility for the correctness or otherwise of any matters contained herein.
Authorised and Regulated by the Financial Services Authority.
Wednesday, 18 February 2009
SINGLE CURRENCY ON THE RACK BUT STERLING FEELS SHORT-TERM PAIN
In a week that many expected to be a foul one for Sterling, with the Consumer Price Index due to join Bank Of England MPC minutes in further strengthening the case for heavy continued monetary and fiscal easing, undermining the yield appeal and future real value of Sterling, the currency has not actually fared too badly thus far. Most of this, with GBP/EUR in mind, has been thanks to a huge deterioration in sentiment on the Eurozone, although GBP/USD has smarted hard from risk negativity bolstering the Dollar.
Volatility has certainly been the name of the game for GBP/EUR over the last couple of days, the result of which has been little overall concerted movement. Extreme concern over Eastern European Banks, most of which are owned by Western European Banks, combined with rocketing bond spreads for other smaller Eurozone states has put some heavy pressure on the single currency, giving Sterling some good support against it. Furthermore, on the UK side, a higher than expected Consumer Price Index figure at 3 percent year-on-year for January, reported for the UK yesterday alongside 0.1% growth in the Retail Price Index, has also been beneficial for the GBP/EUR case. This data, which essentially indicates that prices are not dropping as far and as fast as many economists have expected over the last few months, although it does little in the medium and longer term outlook for UK interest rate curves, will certainly take the sting out of quantitative easing talk, which has reached a real crescendo over the last weeks.
Despite the above, Sterling still looks set to take a hammering today ahead of minutes from the Bank of England’s February meeting. Although there will certainly be nothing new in the minutes, which will only confirm that all Members are unanimous in a decision to keep base rate relatively stable whilst enacting incremental degrees of asset buying to try and elevate general market prices, the market’s focus on them will undoubtedly lead many to abandon long positions in the currency on the very short-term just in case of any surprises. Expect GBP/EUR to move down towards the 1.1150 level over the course of the day with GBP/USD also looking vulnerable at 1.41 as the Dollar is bought against most major currencies.
Raphaels Bank CFX Team
0800 587 8722
cfx@raphael.co.uk
www.raphaelsbank.com/cfx
This newsletter is the personal view of Raphaels Bank and nothing herein should be construed as a recommendation or advice. The Bank accepts no responsibility for the correctness or otherwise of any matters contained herein.
Authorised and Regulated by the Financial Services Authority.
Tuesday, 17 February 2009
TOUGH TIMES ON THE HORIZON
Figures out this week from both sides of the pond are looking like they will confirm that the annual rate of inflation is decelerating. This may on some measures show inflation as negative. This may sound like good news to households where incomes have been squeezed by tax rises and higher bills. But a sustained period of deflation would have huge economic costs. While the risk that deflation will take hold of the Western economies is small, the prospect is powerfully exercising the minds of central bankers and explains the urgency with which the BoE and the Fed have cut interest rates. Deflation would be the worst of outcomes for the global economy.
Unfortunately, easy monetary policy also stimulated an unsustainable boom in asset prices and an irresponsible expansion of credit. The collapse of the housing market bubble and the credit crunch are now pulling the global economy down into recession. Inflation is decelerating sharply, helped by falls in commodity prices. In the UK, the annual rate of CPI declined a full point to 3.1% in December. The BoE expects the figure to fall below 1%. Annual inflation as measured by the retail price index has been falling even more rapidly and is approaching its lowest level since 1960.
Although a short period of falling prices does little damage. Consumers will eventually become used to seeing the prices of some items fall consistently, but a long period of general price falls, as happened in Japan in the 1990s, would be damaging. Consumers would star to postpone purchases, as they would have the ability to buy goods more cheaply in the following months or years. This leads on to both employment and investment collapsing. Stocks fall as corporate earnings would contract. Most damaging, households with debt - either mortgage debt or unsecured loans - would suffer intense hardship. Adjusted for inflation, the value of their debt burden would rise. Deflation would cause hardship, eviction and widespread corporate and personal bankruptcy. This is the risk, if not yet prospect, that both central banks will now contend with
In Europe, German investor confidence (out at 11:00 GMT) is looking likely to show that it has improved for a fourth month in February after the government stepped up efforts to bolster the economy and the ECB signaled it will cut interest rates to a record low. The ZEW Center for European Economic Research is expected to say that its index of investor and analyst expectations rose to -25 from -31 in January. The index reached a record low of -3.9 in July. ECB policy makers say they have room to drop borrowing costs further as the euro area battles its worst recession since World War II. The German Chancellor, Angela Merkel, agreed to spend about €80billion over two years to boost the German economy, the largest in the 16-nation bloc. This has led to Germany’s benchmark DAX share index has rising 4% over the past three weeks.
German GDP slumped 2.1% in the fourth quarter of 2008 from the third, the biggest drop in 22 years. The economy is looking to shrink by a further 2.5% this year, according to the IMF. Porsche SE, have reported a 14% plunge in sales, and Volkswagen AG’s Audi luxury division expects a “super difficult” year.The ECB has cut its rates by 2.25% points since early October to 2%, the most aggressive easing since the bank took control of monetary policy a decade ago. This is expected to drop further to 1.5% in their March meeting.
Raphaels Bank CFX Team
0800 587 8722
cfx@raphael.co.uk
www.raphaelsbank.com/cfx
This newsletter is the personal view of Raphaels Bank and nothing herein should be construed as a recommendation or advice. The Bank accepts no responsibility for the correctness or otherwise of any matters contained herein.
Authorised and Regulated by the Financial Services Authority.
Unfortunately, easy monetary policy also stimulated an unsustainable boom in asset prices and an irresponsible expansion of credit. The collapse of the housing market bubble and the credit crunch are now pulling the global economy down into recession. Inflation is decelerating sharply, helped by falls in commodity prices. In the UK, the annual rate of CPI declined a full point to 3.1% in December. The BoE expects the figure to fall below 1%. Annual inflation as measured by the retail price index has been falling even more rapidly and is approaching its lowest level since 1960.
Although a short period of falling prices does little damage. Consumers will eventually become used to seeing the prices of some items fall consistently, but a long period of general price falls, as happened in Japan in the 1990s, would be damaging. Consumers would star to postpone purchases, as they would have the ability to buy goods more cheaply in the following months or years. This leads on to both employment and investment collapsing. Stocks fall as corporate earnings would contract. Most damaging, households with debt - either mortgage debt or unsecured loans - would suffer intense hardship. Adjusted for inflation, the value of their debt burden would rise. Deflation would cause hardship, eviction and widespread corporate and personal bankruptcy. This is the risk, if not yet prospect, that both central banks will now contend with
In Europe, German investor confidence (out at 11:00 GMT) is looking likely to show that it has improved for a fourth month in February after the government stepped up efforts to bolster the economy and the ECB signaled it will cut interest rates to a record low. The ZEW Center for European Economic Research is expected to say that its index of investor and analyst expectations rose to -25 from -31 in January. The index reached a record low of -3.9 in July. ECB policy makers say they have room to drop borrowing costs further as the euro area battles its worst recession since World War II. The German Chancellor, Angela Merkel, agreed to spend about €80billion over two years to boost the German economy, the largest in the 16-nation bloc. This has led to Germany’s benchmark DAX share index has rising 4% over the past three weeks.
German GDP slumped 2.1% in the fourth quarter of 2008 from the third, the biggest drop in 22 years. The economy is looking to shrink by a further 2.5% this year, according to the IMF. Porsche SE, have reported a 14% plunge in sales, and Volkswagen AG’s Audi luxury division expects a “super difficult” year.The ECB has cut its rates by 2.25% points since early October to 2%, the most aggressive easing since the bank took control of monetary policy a decade ago. This is expected to drop further to 1.5% in their March meeting.
Raphaels Bank CFX Team
0800 587 8722
cfx@raphael.co.uk
www.raphaelsbank.com/cfx
This newsletter is the personal view of Raphaels Bank and nothing herein should be construed as a recommendation or advice. The Bank accepts no responsibility for the correctness or otherwise of any matters contained herein.
Authorised and Regulated by the Financial Services Authority.
Monday, 16 February 2009
GRIM OUTLOOK AHEAD AS UK GDP EXPECTED TO CONTRACT 3.3%
The confederation of British Industry have proclaimed that the UK economy will shrink at almost twice the pace previously forecast this year as the credit famine plunges the nation deeper into the worst recession in almost 30 years. GDP will contract 3.3%, instead of the 1.7% predicted in November, the biggest U.K. business lobby said today. This means that by the end of 2009, the economy will have contracted for six consecutive quarters. Richard Lambert, the CBI’s director general, told the press in London that the UK is “Faced with a global confidence crisis, a rapid fall in demand and credit constraints, U.K. firms have been forced to scale back investments and cut jobs.” Government net borrowing will balloon to £148.7 billion in the next financial year, or 10.6% of GDP, and then rise to 11.8% of GDP the following year, the CBI said in the forecasts. This contradicts the view of The Chancellor, Alistair Darling, said in November that borrowing would be 8 % of GDP in the year ending March 2010. Also in a report this morning, Oxford Economics said that the recession will damage Britain’s long-term growth prospects. GDP will grow 2.1% a year on average between the second half of 2006 and the final two quarters of 2018, compared with an average 2.9 % expansion in the previous economic cycle, the report showed.
Asking prices for homes on sale in Britain are said to have risen by 1.2 per cent last month. According to Rightmove, the property website, which revealed the increase, it is down not to a much-wanted revival but to a burst of “false optimism” among those marketing their properties and a chronic shortage of new homes coming on to the market. In the past four weeks 45 % fewer properties were put up for sale than in the same period last year – 75,140 new homes, compared with 137,442, property website Rightmove found. Rightmove believe that this lack of competition had prompted both sellers and agents to become more bullish by increasing asking prices, despite predictions that house prices have a further 10% to fall. Asking prices recorded by Rightmove increased from £213,570 in January to £216,163 this month, compared with an average sales price of £184,333, according to the Centre for Economics and Business Research. Asking prices in London rose by 0.3%, from £386,653 to £387,988. Rightmove said that national asking prices were down by 9.1% on average over the year – the biggest annual fall it has ever recorded – but noted that properties are selling once 25% has been knocked off the peak price.
Elsewhere in the world, Japan has revealed that it sank deeper into recession with its worst quarterly contraction in 35 years, data showed on Monday, its reliance on exports and soft domestic demand dragging down the world's second-largest economy. The G7 financial leaders meeting in Rome, fearing another 1930s-style resurgence in protectionism, pledged at the weekend to do all they could to fight recession, but major world economies still faced the biggest downturn in decades. Such fears were expected to be high on the agenda for the new U.S Secretary of State, Hillary Clinton, when she arrives in Tokyo on Monday for her first foreign trip. New U.S. stimulus measures about to be signed into law include a "Buy American" provision. With both the U.S. and Japanese interest rates already close to zero, G7 leaders are having to look beyond conventional economic tools once they can't cut rates any further, with a possible return to Japan's experiment with quantitative easing earlier this decade. ECB President Jean-Claude Trichet foreshadowed "non-standard measures" to tackle the crisis, but said the ECB had not drawn any conclusions after discussions with other central banks. "I have said that I did not exclude additional non-standard action, but no decision has been taken yet on top of the non-standard action we have already decided to do and we will see." Trichet gave no concrete plans, but it was hoped he would provide more clues with an address later this afternoon.
CFX Team
0800 587 8722
cfx@raphael.co.uk
www.raphaelsbank.com/cfx
This newsletter is the personal view of Raphaels Bank and nothing herein should be construed as a recommendation or advice. The Bank accepts no responsibility for the correctness or otherwise of any matters contained herein.
Authorised and Regulated by the Financial Services Authority.
Asking prices for homes on sale in Britain are said to have risen by 1.2 per cent last month. According to Rightmove, the property website, which revealed the increase, it is down not to a much-wanted revival but to a burst of “false optimism” among those marketing their properties and a chronic shortage of new homes coming on to the market. In the past four weeks 45 % fewer properties were put up for sale than in the same period last year – 75,140 new homes, compared with 137,442, property website Rightmove found. Rightmove believe that this lack of competition had prompted both sellers and agents to become more bullish by increasing asking prices, despite predictions that house prices have a further 10% to fall. Asking prices recorded by Rightmove increased from £213,570 in January to £216,163 this month, compared with an average sales price of £184,333, according to the Centre for Economics and Business Research. Asking prices in London rose by 0.3%, from £386,653 to £387,988. Rightmove said that national asking prices were down by 9.1% on average over the year – the biggest annual fall it has ever recorded – but noted that properties are selling once 25% has been knocked off the peak price.
Elsewhere in the world, Japan has revealed that it sank deeper into recession with its worst quarterly contraction in 35 years, data showed on Monday, its reliance on exports and soft domestic demand dragging down the world's second-largest economy. The G7 financial leaders meeting in Rome, fearing another 1930s-style resurgence in protectionism, pledged at the weekend to do all they could to fight recession, but major world economies still faced the biggest downturn in decades. Such fears were expected to be high on the agenda for the new U.S Secretary of State, Hillary Clinton, when she arrives in Tokyo on Monday for her first foreign trip. New U.S. stimulus measures about to be signed into law include a "Buy American" provision. With both the U.S. and Japanese interest rates already close to zero, G7 leaders are having to look beyond conventional economic tools once they can't cut rates any further, with a possible return to Japan's experiment with quantitative easing earlier this decade. ECB President Jean-Claude Trichet foreshadowed "non-standard measures" to tackle the crisis, but said the ECB had not drawn any conclusions after discussions with other central banks. "I have said that I did not exclude additional non-standard action, but no decision has been taken yet on top of the non-standard action we have already decided to do and we will see." Trichet gave no concrete plans, but it was hoped he would provide more clues with an address later this afternoon.
CFX Team
0800 587 8722
cfx@raphael.co.uk
www.raphaelsbank.com/cfx
This newsletter is the personal view of Raphaels Bank and nothing herein should be construed as a recommendation or advice. The Bank accepts no responsibility for the correctness or otherwise of any matters contained herein.
Authorised and Regulated by the Financial Services Authority.
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