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.

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