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.