US POLITICAL ACTIVITY CONTINUES TO LEAD MARKETS

US POLITICAL ACTIVITY CONTINUES TO LEAD MARKETS

Financial markets were gripped once again by the zeitgeist of fear yesterday as investors decried comments by the US administration regarding the likelihood of more bank bailouts being on the horizon. In essence, where many commentators jumped on the optimism of last week to call a bottom to the markets and negative growth, Obama and his pals have very kindly reminded them that the grim reaper is still thirsty for blood. In addition to whimpering fear over the main political pronouncement, equities also took a further spanking thanks to news that both General Motors and Chrysler, being two of the biggest and most highly inter-linked companies in the global economy have been denied a rescue by the US Government and now have only one last chance to formulate a viable plan to keep the companies liquid.

As we have come to entirely expect, the current market formula for economic bearishness was followed in response to the above: the Dollar and the Yen were snapped up, with the Euro, the Pound and other riskier currencies being dropped. However, mere weeks ago, the flow into US Treasuries and the Dollar in general would have been much stronger if it weren’t for the Fed’s quantitative easing programme being rolled up. This is what, even in a week where the European Central Bank is fully expected to drop its base rate once again, is keeping the Dollar from bounding all the way back to yearly highs across the Board. The game can therefore be said to be shifting somewhat – so don’t expect the 1.20s on EUR/USD again anytime soon.

However, the ECB could surprise the market into some heavy volatility later in the week. If the Central Bank even squeaks about potential for future expansion of money supply to put a rocket up its regional coffers, the Euro could be sold dramatically. This could quite feasibly drop GBP/USD back down sub 1.40 and give GBP/EUR a shot in the arm to above the 1.10 level. The next couple of days will most likely see market consolidation ahead of what will certainly be a very unpredictable and potentially powerful event.

Today sees fairly little in terms of mainstream economic data. UK Consumer Confidence, released this morning, has given Sterling some good support though, being a much more positive figure than expected, buoyed by a relaxation in general mortgage payment levels over the last month. Expect the rest of the day to see fairly little activity though with GBP/USD likely to stay within 1.42-1.44 and GBP/EUR looking like moving around 1.07-1.08.

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.

DEMAND FOR UK GILTS FALTERS AS PUBLIC SPENDING SOARS

DEMAND FOR UK GILTS FALTERS AS PUBLIC SPENDING SOARS

As the Bank of England failed to receive enough bids to cover the whole of a 1.75billion Pound auction for long-dated gilts yesterday, there was one question which sprang to mind in light of the government’s recent fresh plan to raise more cash for a heavily indebted UK this year – guilty of debt mismanagement? Clearly, Gordon Brown’s announcement yesterday to try and raise around 150 billion Pounds of finance for the UK economy over the year from global markets, combined with the fact that the BOE couldn’t find enough demand to sell a small portion of this debt, are linked. The market simply believes that UK finances could be becoming way too leveraged in the face of tumbling growth and rising regional unemployment.

An economy which has relied explicitly on financial services over the last couple of years to finance spiralling public spending and public debt, quite frankly, is not going to look like the best buy as this area of the world economy contracts severely, especially with yields being sought by investors for sovereign debt increasing in the face of overwhelming supply. This, unfortunately, represents yet another piece of market information that does not bode well for the Pound. If it becomes increasingly apparent over coming months that the UK public sector is savagely wasting more money amidst a continued slump in growth and stagnancy in the financial sector, then de facto, the UK currency will continue to be unattractive. Not only will the obvious happen, in terms of global investors shunning UK gilts for fear of default, but traders will continue to conduct raids on the currency in attempts to capitalise on general sentiment in burrowing it further into the floor.

There really is a terrible risk at the moment of a ‘perfect storm’ for the UK. Prices continue to rise as the Sterling sell-off, sparked initially by the financial crisis, puts pressure on importers to recover exchange-rate losses. This combines with deflationary pressure to create a scenario where monetary policy, instead of being effective, merely exacerbates inflation whilst doing little to calm the real effects of negative growth. Investors, who, having already removed vast capital from the UK thanks to the retreat of global finance and equity instruments, also begin to remove fixed-income funds as fear grows that Sterling will be physically devalued by quantitative easing with the UK possibly defaulting on debt. Could all these factors combine for another 1976-esque IMF bailout later this year or next? As Mervyn King noted in Parliament yesterday, only exceptionally stringent management of both figures and public perception by the Government can now avert such a crisis.

Today sees UK Retail Sales in the morning with US Unemployment Claims certainly providing some interest for the afternoon. Combined, both sets of figures ought to keep the pressure on GBP/USD, currently trading around the 1.46 mark, whilst also capping GBP/EUR gains, trading this morning around 1.07.

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.

FED PLAN HAZY - GBP/USD STILL GLIMMERS

FED PLAN HAZY - GBP/USD STILL GLIMMERS

The upshot of yesterday’s main event, a fresh and seemingly vigorous new plan by the Federal Reserve to purge the US banking system of its dirty assets, was pretty stale. The scheme, which involves flushing out around 1 trillion Dollars worth of questionable, mainly mortgage-based, instruments by using Government loans to encourage uptake, is theoretically powerful, but sadly lacked the practical technicalities to spur investors into the monster equity rally which we half-expected. Despite being formally vaunted by US Treasury Secretary Timothy Geitner the whole operation simply has not captivated investors enough on the short-term to extend last week’s rally against the Dollar and into equities and riskier market assets. It is simply too vague at the moment and will have to be much more fleshy before it gives the markets enough strength to jettison more Dollar holdings and US Treasuries in favour of the belief in an impending bottoming out of negative growth and the return of cheap equities.

The result of the above then was a very lacklustre day on currency markets. The wild-eyed fervour of last week which saw bumper sell orders on the Dollar was trumped by ghostly silence as traders bemusedly decided to pare bets instead of overextend themselves in a market that has come a long way in a very short time. As EUR/USD fell back to 1.35 from 1.37, it wasn’t necessarily that Dollar-based risk aversion had taken hold again, but more that speculative positions had been pared, for now. GBP/USD, as we would have expected, also pulled back from 1.46 to 1.44, driven by the proxy effect of the Dollar in its own right.

GBP/EUR, currently suffering terribly under the weight of the newly popular single currency moved down to the 1.06 mark as a poor show by the FTSE added to the Pound’s struggle. As we continue to comment though, GBP/EUR will only conceivably experience a hearty renaissance when the ECB, at the very least, shows itself to be intending on joining the global Central Bank money-printing brigade. Currently the single currency is too well insulated in terms of its corresponding monetary policy to be scared by the Pound even if global financials bounce.

Today will likely see another push on GBP/USD as investors tentatively adopt stock market positions and look at emerging market equities further to yesterday’s events. GBP/EUR should also gather some small momentum as a barrage of Eurozone manufacturing data this morning brings the Continental region back into the limelight. Expect a top of 1.4750 on GBP/USD and 1.0850 on GBP/EUR for the morning ahead of some extremely important UK-events including CPI and Inflation Report hearings. Further to these, which may highlight the growth of inflation at a faster pace than expected, Sterling markets may be tentative for the rest of the day.

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.

STERLING STILL VERY TENSE AS QUANTITATIVE EASING PRICES EMERGE

STERLING STILL VERY TENSE AS QUANTITATIVE EASING PRICES EMERGE

As anticipated, prices on Sterling pairs relaxed yesterday. GBP/EUR and GBP/USD both drifted slightly upwards as a proportion of big speculative positions being run against the UK currency were closed in the absence of any further major market negativity. Market close saw both pairs left fairly unchanged on the day though at 1.0850 and 1.3850 respectively. In terms of data, the morning did see UK Manufacturing Production, although this didn’t manage to prompt any further heavy staking of positions, despite the figure showing an unbelievably steep contraction of -2.7% in February.

The Manufacturing figure is extremely troubling though, especially given the case continually made by the Government until very recently that Pound depreciation and a competitive UK export sector would heavily support industry this year. If, as we all already know, financial services are swallowed up in the Government’s debt-riddled black hole of bureaucracy, then it is the country’s strength as an exporter that is going to be put to the test in terms of GDP output for coming years. The balance between the two is clearly shifting, and, unlike say Germany, which has a history of comparative advantage for its extremely high quality industrial equipment, the UK quite simply has fairly little to offer. A culture of consumption driven by a hyper credit bubble and an almost complete reliance on global services has left the UK looking pretty naked and alone in the current climate where cash is being hoarded and debts are being called in on a global scale.

So the current question of the moment is with regard to the short and medium-term trajectory of the Pound. The bigger picture is that the UK’s balance sheet is currently ballooning with all variety of defunct credit instruments and new gilt-based debt, all being replaced by fresh notes straight from the printers. This could be good for currency value – if investor belief is that it will kick-start an economy to action. It could though, be very bad for currency value if the view is that the debt is being created but can never be easily serviced or repaid. On the short-term, the current mood is dictating the latter, but on the longer term the former will probably be the reality.

The rest of the month sees a whole smattering of data from the UK, all of which will be bad, with very little from Europe. GBP/EUR can therefore be expected to move between 1.06 and 1.13 for March-April. Onwards from April will be likely to yield upwards of the 1.15 mark as the European Central Bank moves its effective base rate to zero and considers some type of quantitative easing for the summer. From then on, making the assumption that London can still maintain status as the global financial capital, higher rates could be possible. GBP/USD will probably take a fairly similar root, but will be under much more pressure from a continued Dollar strength as the Euro continues to take the strain.


Rapahels 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.

FAITH AND HOPE DWINDLE AS BANK SECTOR IS SUCKED INTO GOVT VACUUM

FAITH AND HOPE DWINDLE AS BANK SECTOR IS SUCKED INTO GOVERNMENT VACUUM.

Remember Reagan’s famous quip about the nine most terrifying words in the English language? ‘Im from the Government and I’m here to help’ was the infamous line. What a wonderful phrase that was for yesterday’s events with both Lloyds Banking Group and HSBC moving to seek more assistance from taxpayer insurance schemes for bad debt in response to mounting funeral pyres of ‘toxic’ assets. Then the terror came. A huge equity sell-off saw the FTSE plunging down toward the 3500 mark in as the animal spirits of investors were whipped into frenzy over the clear damage of the public sector-led bailout to the future health of the economy. UK Financials in particular were hit very hard over worries that some Banks may be entirely nationalised, with the rest shrinking beyond recognition over coming years as the global financial crisis continues to swing its scythe.

GBP/EUR managed to finish the day around the 1.09 mark with GBP/USD barely recovering to 1.38 having tested the 1.37 levels. As commented on Monday, if any selling was going to be prompted on Monday, it was going to have potential for explosiveness with a lack of any other real data for market players to fight over. In such dark times though, it may provide some balm, for those on the front-line of the currency markets, to have a concerted consideration of the metaphysics of the situation. By this, we refer to what is really at stake beneath the whole hyperbole of frantic analysis of growth, economies, toxic-debt, value destruction etc.

The media, as a reflection of the hopes and fears of society in general, cannot stop bewailing the destruction of all of the above, but what do these categories really mean? As should be relatively clear, markets are made up of assets, although, in fact, the market is itself an asset, it is an ideological asset. Hyper-speed Capitalism, just like the myriad of products it has created is designed for growth. It was designed to offer an alternative to the boom and bust Keynesian markets of the early twentieth century, as well as to offer an opponent to the Socialist model of the same era. However, like the products it produces (i.e currency prices, equity prices, bond prices, house prices) it is first and foremost a system of the mind – it requires belief and co-operation to be sustained. The UK economy is actually quite unique in that it requires belief and co-operation of an explicitly financial nature to be sustained at past levels (bearing in mind the huge proportion of GDP for the UK in past years coming from the financial sector). What is being reflected in currency markets at the moment is therefore, truly special.

Investors are mulling over the very future of London and the UK in a potentially, completely different ideological and regulatory environment – whether or not anyone has real faith remains to be seen. The problem with falling currency prices is the same problem that began the whole economic slump in the very beginning – it is one of over-extension and over-consumption leading to loss of faith, which then leads to over-extension and over-caution. This system should normally, obviously, be self-correcting. However, in a current climate where the structure of the system is being shifted, in terms of private giving control over to public (which is currently most extreme in the UK) then there is little knowing how the situation may change.

Today will see GBP/USD and GBP/EUR holding at the 1.38-1.39 and 1.08-1.09 levels respectively before UK Manufacturing Production data this morning, which is likely to show further massive curtailment for UK Industry. However, considering the velocity of yesterday’s sell off on the Pound, the rest of the day will probably see some stabilisation and profit-taking with possible slow movements back upwards on both pairs.

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.

POUND WELL HUNGOVER FROM WEEKEND OF BANKS BINGEING ON GOV MONEY.

POUND WELL HUNGOVER FROM WEEKEND OF BANKS BINGEING ON GOV MONEY

Foreign exchange markets last week continued to be structured by high Dollar demand as fear over the inefficacy of Central Bank measures to calm the global economy, combined with terrible data on the state of real economies, continued to boost the currency. Despite a small but sharp sell-off on Friday after US Non-Farms, showing a monthly decline of 650,000 jobs in the US, the currency still found favour thanks to its position as the world’s main source of capital funding and its current status as an asset haven which is running in a now largely divorced relationship from the actual performance of the American economy.

Dollar pressure contributed hugely to a considerable decline in GBP/USD over the week, which retreated heavily from a push to the 1.44-1.45 area at the beginning of the week to hold at the psychologically important 1.40 mark at its end. However, as very poor performance over the week from GBP/EUR showed, Sterling put in an extremely poor show in its own right. Despite the European Central Bank being very dovish in a forecast for its interest rate curve on Thursday, the market’s main concern was focused on the health of the UK economy in light of the Bank of England commencing its first ever quantitative easing programme this month. To put it simply, Sterling investors are concerned over two dangers that accompany measures to try and enhance UK money supply. The one is that the measures, which are beginning at the creation of around 100 billion Pounds of gilts, will be very difficult to control in the long-term, possibly leading to unbridled inflation. The second is simply that the measures will have no effect and are actually indicative of an economy sliding into the abyss.

However, despite the above, GBP/EUR has still managed to hold itself above the 1.11 mark for open this week. This reflects, first and foremost, the appalling outlook on an extremely weak Eurozone and a highly questionable recent history of European Central Bank Policy. Secondly though, there is certainly an argument out there at the moment that, given the dilapidated nature of the global outlook, the Bank of England may simply be ahead in a game of last resorts to stoke a failing economy. If this proves to be the case and conditions do continue to deteriorate, then, while Sterling may not rebound on the short-term, it certainly has girding for the medium-term.

Following a further increase in the UK Government’s stake in Lloyds Banking Group over the weekend, Sterling will probably take a short-term pasting this morning. Though the currency will probably recover later in the week, the lack of any major economic data today to turn investors attention elsewhere, a focus on the UK Governments fiscal strains and falling credit rating will probably push GBP/USD sub 1.40 again with GBP/EUR likely struggling to hold onto 1.10.

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.

NEW TERRITORY FOR BOE MEANS POSSIBLE NEW HORIZONS FOR POUND

NEW TERRITORY FOR BOE MEANS POSSIBLE NEW HORIZONS FOR POUND

The Bank of England announced yesterday that it would be utilizing its first raft of Quantitative easing measures, essentially creating money and using the funds to stimulate economic growth by purchasing government and corporate bonds. The UK also saw its benchmark interest rate cut to its lowest-ever level of 0.5 % from 1% with the European Central Bank also cutting by half a point to 1.5%.

BoE policy-makers are hoping that buying government securities, which will be done to a total of 75 Billion Pounds-worth over the next three months will encourage more liquidity in the economic system as a whole as money supply increases and prices expand from the top-down. The move reflects a conviction that the standard policy tool of short term interest rates has become increasingly ineffective. Purchases will be focused on corporate credit markets, so as to improve lending to the private sector, and medium- and long-term government bonds. The BoE said it would "monitor the effectiveness of this purchase program in boosting the supply of money and credit and in due course raising the rate of growth of nominal spending, adjusting the speed and scale of purchases as appropriate. With the latest 0.5% reduction, the BoE rate is rapidly approaching that of the US Federal Reserve, which has set its benchmark at a range from 0 to 0.25%.
In Europe, the ECB's reluctance to bring down interest rates more quickly has attracted widespread criticism from economists, who argue that the economy of the 16-nation euro zone is contracting so sharply that little would be lost by lowering borrowing costs faster. Senior officials on the ECB's rate-setting Governing Council are split over where to go next. Athanasios Orphanides, the central bank governor of Cyprus and a former economist at the Federal Reserve, has emerged as a spokesman for considering pushing short-term rates down fast and considering new policy tools. The German members of the council, Jürgen Stark and Axel Weber, have been more skeptical and have tended to worry that ultralow interest rates helped cause the current crisis in the first place. On Thursday, the European Union's statistics office confirmed its earlier estimate that quarter-on-quarter GDP in the euro zone shrank 1.5% during the October to December quarter, after a 0.2% drop in the previous quarter.

The FX market reaction to the above events was fairly muted, with most fun being had on equity markets with main indices across the world dipping sharply in response to a general despondency over the potential efficacy of the Central Bank measures. The reduction in both European and UK interest rates was widely anticipated by speculators and interest rate futures which resulted in very little overall movement with GBP/USD continuing to hang on to the 1.41-1.42 mark and GBP/EUR looking sheepish around 1.12.

Data out today is mainly US based with Non-Farm Unemployment and the US unemployment rate both out at 2:30 GMT, both of these are expected to be negative and may therefore prompt some dollar weakness in the run upto the afternoon. This may however fade into Dollar strength though as Dollar-denominated market positions are pared for the weekend and as the potential horror of the US data sinks in prompting some heavy risk aversion trades. Expect GBP/USD to continue in its channel of 1.41-1.43 for the day with GBP/EUR possibly testing 1.1150.

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.

QUANTATIVE EASING - IS IT A CAR CRASH IN THE MAKING?

QUANTATIVE EASING - IS IT A CAR CRASH IN THE MAKING?

Observing this recession is rather like watching slow-motion footage of a car crash. The front bumper of the vehicle is share prices and money growth. Shares started really sliding in the autumn, around the same time that Lehman Brothers declared itself bankrupt. This coincided with a sudden and unprecedented collapse in world trade. The impact of the collision is still travelling through the frame of the car however, shattering both corporate and individual fortunes with inexorable inevitability as it passes on. Investors have abandoned the markets because of their fright about the slide in profits and the rise in redundancies that lie ahead in the coming months. It will only be at the end of this year, when unemployment is closer to three million than two million, that we will truly know how it feels to be in the thick of a recession. Sir Fred Goodwin may be viewing himself both a scapegoat and a victim, but how would the revelation of his £700,000 pension have gone down eight months ago with 10% out of work for the first time since the 1980s. Considering the amount of expendable cash in an economy is directly related to growth and inflation, If BoE policy makers had looked at money growth in 2006, as it soared by a massive 14.5%, they would have been able to heed a warning about the un-sustainability and scale of the boom. Looking at it now policy makers would see that it is growing by a mere 3.8%, which is still severe recession territory.

At midday today emergency measures to prevent the depression-scenario will culminate here in Britain when the BoE will confirm that it is about to start printing money for the first time in its history. Quantative Easing is a terrifying prospect for those aware of how easily governments can trigger hyperinflation by employing the printing presses, but it may also provide the catalyst necessary to turn the economy around. The BoE’s aim is very simple: to increase the amount of cash flowing around in the UK, which should, in turn, enable companies and people to spend a little more, and to avoid the prospect of deflation.

The ECB is also looking increasingly likely to follow suit. It has argued, quite reasonably, that quantative easing will potentially generate high inflation in the coming years. But the more pressing prospect of impending European economic collapse, and indeed the threatened disintegration of the euro itself, are compelling enough arguments for it to change its mind. Preventing high inflation is a worthy aim, but useless if, after all your efforts, there's no functioning economy left. Add to this that retail sales in Germany, Europe’s largest economy, unexpectedly fell in January as consumers fretted about job security and reined in spending.The Germans are battling their worst recession since World War II. The IMF expects their economy to contract 2.5%. Unemployment was up for a fourth month in February as a collapse in foreign demand prompted companies to shed jobs. This prompted the German government to spend €80billion on measures to stimulate growth, including tax cuts and subsidies to get consumers to buy new cars. With the ECB looking at a probable lowering of its main lending rate by 50 basis points (down to 1.5 %) when policy makers meet in Frankfurt today major currencies should be looking to make some ground against the Euro. The euro fell against the dollar on speculation that Trichet will lower interest rates today and signal further cuts are needed to curb the deepening recession.

The markets are obviously dominated by the Bank of England rate announcement at midday. This will be closely followed by the ECB rate decision at 12:45. Other data out today includes US initial jobless claims at 1:30 this afternoon

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.

WHAT’S AT STAKE IS WHETHER RECESSION TURNS INTO DEPRESSION

WHAT’S AT STAKE IS WHETHER RECESSION TURNS INTO DEPRESSION

The U.K. economy contracted 1.5% in the fourth quarter, the biggest contraction since 1980, as consumers cut spending. Brown’s government last month ordered Northern Rock, the nationalised bank, to expand lending to help the economy. Ministers also agreed to guarantee £325billion of Royal Bank of Scotland Group Plc’s investments. Chancellor of the Exchequer Alistair Darling suggested yesterday that the Bank of England could start printing money as soon as this week, as interest rates lose their ability to revive growth. Policy makers may lower the key rate by a half point to the lowest since the bank was founded in 1694.

BoE Governor Mervyn King said in February he’ll buy up to £50billion pounds of debt “as soon as possible,” after cutting interest rates to a record low failed to open debt capital markets to the companies that need cash most. The last borrower with non-investment grade ratings to sell bonds in pounds was Dutch electric-generation company Intergen NV in July 2007, when credit markets froze for all but the safest borrowers. The bond-buying program comes after the central bank started to purchase commercial paper last month, and is the next stage toward quantitative easing, where Governments increase money supply to reduce its cost and stoke the economy. Policy makers are trying to ease access to funding after banks worldwide lost or wrote down $1.2 trillion since the start of the credit crisis. Investment-grade companies including Tesco Plc, the U.K.’s biggest supermarket operator, and Imperial Tobacco Group Plc, the maker of West and JPS cigarettes, have sold £27.9 billion of bonds in Britain’s currency this year. This almost three times the amount issued in the same period of 2008.

Policy makers have reduced the U.K.’s interest rates from 5.75% to an all-time low of 1% since the end of 2007; and are expected to further cut it to 0.5% on March 5. Britain’s economy shrank 1.5% in the fourth quarter of last year, the biggest contraction since 1980, as consumer spending declined. Chancellor of the Exchequer, Alistair Darling, yesterday suggested in an interview in the Daily Telegraph that the BoE could start quantitative easing, or printing money to buy bonds, as soon as this week. . Gordon Brown has also given banks loan guarantees and pushed them to make more finance available to help the economy weather its worst slump in three decades.

U.K. consumer confidence stayed close to the lowest level in at least four years in February as the recession persisted and companies cut jobs, Nationwide Building Society said. An index of sentiment rose to 43 from 41 the previous month, which was the worst result since data began in 2004, the mortgage lender said in a statement today. “Consumers’ views about the current economic and labour market conditions are in line with the recessionary climate in the U.K,” Fionnuala Earley, chief economist at Nationwide, said in the statement. The confidence gauge still rose on the month for the first time since October. A measure of attitudes on buying household goods and making major purchases rose seven points to 92, the highest since October 2006, while an index on expectations for the future increased 5 points to 57. The gauge of attitudes on the present situation fell 2 points to 22.

How does that this affect the markets? The severe stresses in global equities are adding extra weight and support to the "safe haven" US dollar. However, given that the dollar is already trading strongly, and given the latest reports from AIG insurance and the car manufacturers, in financial markets and the US economy, it could be seen that there are limits to the market's appetite to buy dollars. Add to this that in US yesterday; there was more bad news for the housing market. Pending home sales for January fell 7.7% hitting a new all-time low going back to the start of the index in January 2001.

Today’s data sees UK PMI at 09:30 GMT and US ISM non-manufacturing this afternoon at 15:00 GMT.

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.

RISK AVERSION REACHES NEW CRESCENDO - DOLLAR FLIES

RISK AVERSION REACHES NEW CRESCENDO - DOLLAR FLIES

Currencies tied to any level of perceived market risk were burnt into the ground yesterday as the financial world was shaken by two major artillery shells. The first and the most damaging of the two was the news that AIG Group incurred the biggest ever US Corporate loss in history, a frankly inconceivable sum of 61 billion Dollars. The second was word that London-based HSBC Group was all at the ready to try and shore up its dwindling capital base with a monster 12 billion Pounds rights issue. Combined, these two announcements were monumental in gravity, meaning only one thing to investors – ‘run’. And run they did, with the FTSE plummeting to fresh ten year lows of 3600 as the S&P in the US did the same. As we have come to expect, crashing equity burnouts invariably also equate to stark sell-offs in risk-associated currencies, so the Pound unsurprisingly lost a tremendous amount of value over the day.

GBP/USD and GBP/EUR, the latter being thrashed particularly hard by a general overall high-appetite for Dollars, both whimpered to 1.40 and 1.11 levels respectively at close of play. Being driven by the rule that, ‘if it’s bad for the global financial economy then its worse for London,’ how could we have expected Sterling to react any differently? The UK currency, over the last number of years has quite simply been hyper-inflated by the success of London in providing a hub for the co-joining of global industry. If any Initial Public Offerings had to be made, if any Mergers & Acquisitions were on the horizon, or indeed, if you wanted your company in the thick of the action, London and the UK was the place to be. Now, if what they’re shouting from the rooftops is true, and the depression is going to last for years and not months, then GBP/USD and even GBP/EUR can be expected to have a bit of a slog in any bounds to make a recovery anytime soon.

Despite the four horsemen taking a clear fancy to the UK currency as a snack before they continue their tour of the world, there is still plenty of hope for GBP/EUR, even after a day like yesterday. Fans of the European Union will be most upset to learn that yesterday saw the rejection of a proposed 200billion Euro bailout of its Eastern bloc as EU officials snubbed the plan largely over regulatory restrictions. This is bound to put even more stress on the single currency in time, particularly with the exposure that Central Europe has to Asia on top of its Eastern neighbours. Word also that the Bank of England may surprise us all on Thursday by a hold on interest rates, largely with a view to protecting spreads on Bank mortgage lending could also be a salvation for GBP this week as this would certainly prompt some paring of interest rate bets as well as presenting a bottom of the current down-cycle in the interest rate curve. Eyes will certainly be peeled for this at the end of the week.

Overnight saw a paring of shorts on emerging market and higher risk currencies, mainly as a result of an over-extension of moves yesterday, but also thanks to a hold in rates by the Reserve Bank of Australia which spurred some move back into carry trades. In turn this has brought GBP/USD back up to 1.41-1.42 with GBP/EUR also managing to cling on to the 1.11 level. This afternoon and late this morning will probably see a resumption in risk aversion though, with US Pending Home Sales being likely to spook investors once again. Expect 1.40-1.42 on GBP/USD and 1.11-1.12 on GBP/EUR.