US stocks slide on jobs report

US stocks finish a shortened week on a disappointing note on Thursday morning as data showed many more people lost their jobs during June than expected.

A total of 467,000 non-farm employees lost their jobs during last month, 100,000 more than had been expected. However investors took some confidence from the fact that the unemployment rate rose only a notch to 9.5 per cent, its highest since 1983.

Meanwhile 614,000 people claimed jobless benefits for the first time last week, a number that is seen as a more current indicator of the state of unemployment than the figures for June. This was slightly lower than expectations, as was the number continuing to claim such benefits.

Banks, which had been trading lower throughout the morning as investors moved to anticipate the figures, extended their declines. Citigroup fell 1 per cent to $2.94 and Wells Fargo gave up 1.2 per cent to $23.85.

Despite the economic data, trading is thin, with many investors having taken an early break before the long Independence Day weekend.

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Markets resurgent as investor spirits rise

Hopes that the global slump is ending and that recovery is taking firm hold have been reinforced as markets enter the second half of the year on a high after sharp gains in the past quarter.

Stock markets in the West have leapt over the past three months, as upbeat investors bet on a global economic resurgence.

The Pound has also fought back from steep losses as optimism grows that Britain’s recession will end soon. Sterling’s overall value is up by 10 per cent over the past three months.

Investors’ rising spirits are emphasised by a jump of more than two fifths in the MSCI World Index of stock markets across leading economies since it plumbed a low on March 9. The index has racked up gains of more than 20 per cent in the past quarter, registering its best showing since 1998.

In London, the FTSE 100 index has rallied by more than 9 per cent in the past quarter and stands 22 per cent above its nadir reached on March 3. Markets succumbed to a bout of jitters yesterday, however, as the exuberance was challenged by George Soros, the billionaire speculator.

Disappointing economic news underlined the fragility of recovery prospects, helping to leave the FTSE down by more than 1 per cent on the day. The Dow Jones industrial average also suffered a fall of about 1 per cent.

Mr Soros predicted that the United States would endure a “stop-go economy . . . As markets revive, fear of inflation will drive up interest rates, which will choke off recovery,” he said.

Nervousness that Britain’s upturn could be weak and prone to stall was fuelled by GDP figures showing a far steeper first quarter (Q1) slump than previously reported. The economy is now estimated to have shrunk by 2.4 per cent, its worst contraction for 50 years, rather than the 1.9 per cent officially estimated a month ago.

The figures revealed a far graver decline in the services sector, by 1.6 per cent, against a previously reported 1.2 per cent contraction.

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FTSE 100 goes into deep freeze

Markets have been quiet in the past but this morning is almost something different.

In two hours of trading the FTSE has managed to excite absolutely nobody at all after the Dow and S&P went into deep freeze yesterday evening.

With volumes draining away as dealers head off to the beach, there is a good chance that the current moribund conditions will continue for quite some time.

Watching the charts is rather a frustrating pastime, as even small moves look huge due to lack of any major scale with which to compare. The FTSE 100 has now been stuck in a 100 point range for seven sessions and today does not look like changing matters.

One ray of hope is that the Pound has gone for broke this morning and busted straight out of the recent trading ranges.

The 07.00 to 09.00 (UK time) trading period is becoming quite interesting, as Europeans turn on their screens and hammer the market one way or the other.

The high this morning at $1.6742 has been opposed quite strongly since it was hit at 07.21 this morning and we have slipped back to $1.6650ish with punters getting heavily short all the way up.

Those who have dealt with sufficient margin to avoid being stopped out on the way up may be hoping for a nice price correction back into the $1.6200 to $1.6550 trading range, but if we do not get back down there today the chances of a new range being set up are quite strong.

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UK's debt will quadruple unless drastic steps are taken, says S&P

Britain's national debt will quadruple to peaks only ever seen in the wake of the Second World War unless the labour Government takes drastic steps to address the pensions and ageing crisis, Standard & Poor's has warned.

The ratings agency has calculated privately that the UK's public sector debt could quadruple from its current level of just over 50pc of economic output to 200pc or above within the next four decades as the cost of servicing public sector pensions, ballooning social security costs and healthcare burdens becomes overwhelming, The Sunday Telegraph has learned.

The warning is doubly sobering since S&P last month placed Britain's debt on to "negative outlook" – an explicit signal that it could soon be downgraded.

Although the agency calculated two years ago that the effects of an ageing population, alongside high pensions and healthcare costs could push Britain's net debt up above 150pc by 2050, it now fears the added cost of the financial crisis means the debt mountain could in fact rival that in 1945, when the cost of fighting a world war pushed debt well beyond 200pc of GDP.

The warning coincides with research showing that the true size of the UK's unfunded public sector pensions deficit, which needs to be funded through taxpayer's cash, is now £1,177bn – a staggering £20,000 for every person in the UK.

A study for the highly respected British North American Committee, written by former Bank of England economist Neil Record, finds that the UK shortfall is far more severe than in the US or Canada.

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Britain facing biggest deficit in Western world, warns OECD

Hopes that the biggest post war economic slump will soon end have been dashed after the rich world's leading economic institution slashed its forecasts for economic growth and warned that Britain next year faces the worst deficit in the industrialised world.

In a further blow for Alistair Darling, the Organisation for Economic Co-operation and Development also warned that the Government may have to pump more than £130bn extra into the banking system.

Most economic statistics released in recent months have been better than expected, including the CBI's distributive trades survey yesterday, which was the strongest for a year.

However, the OECD downgraded its forecast for UK growth this year to a contraction of 4.3pc – compared with a previous forecast of -3.7pc.

The cut is significant, since the OECD chose on the other hand to increase its growth forecast for the world's leading industrialised economies from -4.3pc to -4.1pc. It added that the 30 member OECD would grow by 0.7pc next year, while Britain would stagnate, not growing at all.

The OECD said that not only was Britain's fiscal position far weaker than its neighbours, following many years of high borrowing by Gordon Brown, the UK was also more vulnerable to a consumer slowdown associated with falling house prices.

The Paris-based institution said the Government's fiscal deficit next year would climb to 14pc of gross domestic product – higher than anywhere else in the OECD, including Ireland and Iceland. The report urged the Bank of England to keep "the [interest] rate as close to zero as possible up to end 2010."

It also warned that more taxpayers' money may have to be poured into the financial system, saying: "further bank losses may well require substantial further capital injections by governments." It said the UK may have to spend a further 3-9pc of GDP – equivalent to £45bn-£135bn.

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Mortgages- fixed rates could reach 6pc within weeks

The average cost of a two year fixed rate mortgage has broken through the 5pc barrier for the first time since January and could soon reach 6pc.

Lenders are now charging an average of 5.04pc to home owners who want to fix their repayments for two years, up from 4.92pc on Monday and 4.74pc at the beginning of last week.

The steep rise in the average rate seen in recent days has been driven by Nationwide's decision to increase the cost of some of its fixed rate deals for the second time in two weeks.

Nationwide was followed by the Woolwich, which raised the cost of one of its two-year fixed-rate deals by 0.7pc, and other lenders are now expected to increase their rates again in the days ahead.

Nationwide sparked the latest round of price increases when it repriced its entire fixed rate mortgage range on June 12.

Other lenders were quick to follow suit, with major groups such as Halifax, Cheltenham & Gloucester, Abbey and Alliance & Leicester all increasing the cost of the deals they offered.

The latest round of price rises is bad news for home owners, with almost 90pc of mortgage borrowers opting for a fixed-rate loan, according to Legal & General, in a bid to lock in to low borrowing costs before the base rate starts to rise again.

But there are still good deals available, with Mansfield Building Society offering a two-year fix of 3.39pc for people with a 25pc deposit who pay a £999 fee, while Britannia Building Society has a two-year rate of 5.99pc for those with only a 10pc deposit who pay a £599 fee.

For those looking to fix for five years, the Post Office has a rate of 4.45pc at a 60pc loan to value ratio with a £599 fee, and Britannia Building Society is offering 6.19pc at a 90pc LTV with a £999 fee.

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ECB lends record €442 billion to banks

The European Central Bank said today that it lent a record €442.24 billion at 1 per cent in one year funds to commercial banks.

The previous record for the central bank’s refinancing operations was €348.6 billion in two-week funds on December 18, 2007 as crisis-hit commercial banks scrambled to bolster their balance sheets during the crunch year-end period.

Interest rates overall would be expected to remain low, a key issue as the eurozone grapples with what is likely to be slow recovery from the worst global recession in more than 60 years.

The ECB has resisted the so-called "quantitative easing" practised by the US Federal Reserve and Bank of England — essentially printing money to buy government and private debt to boost recession-hit economies.

The ECB, however, has generated a flood of cash through loans that will now extend to 371 days, or 12 months, from one week to six months in the past.

Analysts had expected banks to leap at the chance to get an unlimited one-year loan at the ECB’s lowest rate ever.

The central bank has said that in subsequent one-year operations — the next is scheduled for September 29 — the rate could be higher depending on market conditions.

By providing huge amounts of cash to commercial banks, the ECB aims to lower the cost of borrowing by companies and individuals, and spur economic activity.

Money markets influenced by central bank operations determine the flow of credit for vast numbers of people around the globe, from managers trying to fund their businesses to families and students seeking mortgages and personal loans.

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Markets tumble on World Bank's global economy fears

Global stock markets tumbled yesterday on renewed concerns about the health of the world economy.

Global stock markets tumbled on Monday on renewed concerns about the health of the world economy.

The FTSE 100 index lost 111 points, or 2.6pc, to 4,234 – its lowest level since April.

Only four companies in the blue-chip index managed to end the day in positive territory as a drop in commodity prices knocked mining and oil companies.

The oil price fell $1.92 to $67.27 a barrel, and the price of copper fell more than 5pc to a three-week low on the London Metal Exchange.

In America the Dow Jones was down 2pc to 8,370 in mid afternoon trading.

Investors were shaken by a report from the World Bank which warned that the global economy would fall 2.9pc this year before rebounding in 2010.

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World Bank sees deeper and longer slump

World Bank urges continued government stimulus as private sector investment famine cripples recovery in developing countries.

The global recession will be deeper and longer than expected said the World Bank today which is forecasting a harsher downturn this year as the famine in private sector investment cripples recovery among developing countries.

The world economy will shrink more aggressively this year, predicts the bank, contracting by 2.9 per cent, a much steeper decline than it predicted in March when the institution forecast a 1.7 per cent contraction.

The recovery in 2010 will be weaker, an expansion of 2 per cent compared with its previous prediction of 2.3 per cent.

The bank urged governments to continue stimulus spending as it warned that the world was entering an era of slower growth. Developing countries are being hit hard by a collapse in corporate finance as banks and multinational companies rein in their investment plans.

The World Bank's grim forecast sent the price of shares and commodities tumbling around the world.

Copper fell by more than 3 per cent and crude oil slipped further below $70 per barrel, dipping by a dollar to just over $68 per barrel for US Light Crude.

Energy prices have been on the slide over concerns that the economic recovery may be slower and more muted than expected.

The World Bank said that the US economy would shrink by 3 per cent this year while developing countries will grow by only 1.2 per cent, a very sharp slowdown from growth of 8 per cent in 2007 and 5.9 per cent in 2008.

Without the dynamo of the Chinese and Indian economies, the developing world shrink by 1.6 per cent, pushing more of the world's population into severe poverty.

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Public borrowing hits record high of £20bn

Public borrowing hit a record £19.9 billion in May as the recession continues to take its toll, official figures revealed yesterday morning.

May's borrowing was nearly double the £10.6 billion borrowed in April. Public sector net borrowing for this financial year is now £30.5 billion — more than twice the level seen at the same stage 12 months earlier.

Even though May is traditionally a weaker month for public finances, borrowing over the month is the biggest figure since the Office for National Statistics’ (ONS) records began in 1993.

Public sector net debt reached £774.8 billion last month, equivalent to 54.7 per cent of gross domestic product (GDP), far exceeding Labour's now defunct fiscal rules which said that debt would never exceed 40 per cent of GDP.

The number of people claiming unemployment benefits has risen by more than 80 per cent over the last year as companies cut jobs in the face of the sharp economic slowdown.

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Mortgage lending fall undermines recovery hopes

The value of UK home loans granted by banks and building societies fell by 58 per cent in the year to May as homeowners shunned re-mortgaging deals.

Gross mortgage lending totalled an estimated £10.3 billion in May, down 2 per cent compared to £10.5 billion in April and down 58 per cent from May 2008, according to figures published today by the Council of Mortgage Lenders (CML).

There have been signs recently that more home-buyers are returning to the market, with estate agents reporting higher transactions volumes and record rises in buyer interest.

But the CML said that the rise in buyer activity could be being offset by a decline in the number of homeowners taking out new mortgage deals when their fixed-term deal comes to an end. A more detailed breakdown of the figures will be published in two weeks time.

Many banks and building societies have a standard variable rate or SVR that mortgages revert to once the fixed-rate term has come to an end. Many SVRs, which are pegged to the Bank of England base rate, have tumbled since autumn last year as the Bank cut rates sharply.

They are now mostly more competitive than new fixed-deals on the market, prompting many homeowners to take advantage of the lower rate. Many lenders have raised the rates on their fixed-rate deals in recent weeks.

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Bank pours cold water on economic recovery

The Bank Of England is sceptical about the so called recovery in the economy it emerged today as minutes of its June meeting showed it was united on a decision to keep rates on hold.

Minutes from the Bank's meeting two weeks ago revealed the nine member monetary policy committee unaminously voted to keep rates at their historic low of 0.5 per cent.

The Bank conceded that there had been "positive developments" in the economy over the month and that "the risk of a continued sharp contraction in output in the near term had receded."

However, it indicated that a spate of more upbeat recent economic data about the services, industrial and housing sectors gave less reason for optimism than business groups and commentators have suggested.

"Even if developments over the month had been positive, the increase in confidence apparent in some financial market indicators and some household and corporate sector surveys remained fragile," the minutes said.

"There was no reason to conclude that the medium-term outlook for the economy and thus inflation has changed materially since the Inflation Report had been finalised."

Last week, the Pound surged to its highest overall levels this year as hopes that the British economy is emerging from recession continued to burgeon.

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UK inflation falls less than expected to 2.2%

UK inflation fell by much less than expected in May, lengthening the odds of full blown deflation, official figures revealed today.

The consumer prices index (CPI) measure of inflation, the Bank of England's target measure, dropped to 2.2 per cent from 2.3 per cent. Analysts had expected a fall to 1.9 per cent. This is the 20th consecutive month it has been above the Bank's 2 per cent target.

The alternative retail prices index (RPI) inflation measure, which includes housing costs and upon which many pay deals are based, has already plunged into deflationary territory. But it delivered another surprise, edging up from -1.2 to -1.1 per cent last month on the back of rising mortgage rates, confounding economists' expectations of a further drop to -1.5 per cent.

In another sign that prices are rising, core inflation, which strips out volatile energy and food costs, also rose from 1.5 per cent to 1.6 per cent.

The increased price of cigarettes and alcohol, which rose as part of April's budget, helped to push inflation upwards, the Office for National Statistics said, but significant increases came from the rising cost of DVDs, televisions, clothing and footwear- indicating that sterling's weakness is filtering through as foreign made goods become more expensive.

However, policymakers and analysts still expect inflation to fall sharply over the coming months.

Sterling jumped by 0.6 per cent against the dollar to $1.6414 after the figures were released, and rose to the highest level this year against the euro, which fell to 84.44 pence against the pound.

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Oil price falls below $71 as US Dollar surges

A resurgence in the Dollar and concern about the fragility of economic recovery is depressing the oil price which fell below $71 per barrel in early trading this morning.

Buoyancy in the US currency is overshadowing the turmoil in Iran and keeping a brake on speculators in oil which normally surges during periods of instability in the Middle East.

The price of a barrel of US light crude for delivery in July fell by more than a dollar to $70.95 in trading in Singapore, continuing Friday's decline in crude when poor industrial output figures in Europe shook confidence in the likelihood of a speedy economic recovery.

The dollar rose half a percentage point against the euro to $1.3942 in a market still rattled by the weak April industrial production figures. Other commodity prices were also weakened by the strong dollar and doubts about the resurgence in demand for primary goods.

In Shanghai, copper fell its maximum daily limit of 5 per cent, while London Metal Exchange copper fell 2.8 per cent to $5,085 per tonne. Meanwhile, Brent crude fell by more than a dollar per barrel to $69.89 in Singapore trading.

A stronger dollar tends to depress oil and metal prices as investors using non-dollar funds find the commodities more expensive.

Alistair Darling, the Chancellor, voiced concern last week that soaring energy costs might put at risk an economic recovery.

Oil has doubled in price since the beginning of the year and Opec recently said that the recession in the oil markets was over.

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One in ten UK homeowners in negative equity

1 in 10 UK homeowners fell into negative equity during the first three months of the year, the highest proportion for 15 years according to the Bank of England.

The Bank estimated that between 7 and 11 per cent of homeowners with a mortgage owed more to their lender than their property was worth, the equivalent of 700,000 to 1.1 million householders.

Negative equity may have amplified the speed and scale of the recession, the Bank said in its Quarterly Bulletin.

“Large losses on mortgage loans and associated securities can erode banks’ capital positions, affecting both lenders’ willingness and ability to lend and, in extreme cases, their solvency.”

Around 200,000 buy-to-let investors were also estimated to owe more on their mortgage than their property was worth, in a sector particularly battered by the economic downturn.

The research said that the overall number of those in negative equity during the first quarter of 2009 was comparable with those who suffered the problem in the mid-1990s, during the last housing market correction.

The Bank said house prices had fallen by around 20 per cent between the autumn of 2007 and the spring of 2009, the largest nominal fall in property values on record. In contrast, it took six years for house prices to fall by 15 per cent between 1989 and 1995.

But despite the steep drop, the Bank’s research suggested that between 73 per cent and 78 per cent of households who were in negative equity faced a shortfall of less than £15,000, and between 56 per cent and 65 per cent had one of less than £10,000.

The bulletin said that the UK’s biggest banks lent five times the value of their shareholder’s capital in home loans. In turn, 40 per cent of mortgage debt was packaged up and sold to raise more loans, increasing the risk of losses, the Bank said.

There are no figures which accurately measure the number of people who are in negative equity, so the Bank based its estimates on three studies. A survey of mortgage holders, data from the Financial Services Authority, and the lenders’ own data.

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Wise Money lifted by jobs data

Markets climed higher in early US trades as the latest report on jobless claims turned out to be better than expected and retail sales improved.

The Dow Jones was up 62.13 points at 8,801.15 at midday in New York, the S&P 500 was up 8.57 at 947.72, and the Nasdaq was up 11.48 at 1,864.56.

A Labor Department report showed first-time jobless benefits claimants fell to 601,000, better than expectations. The Commerce Department said retail sales increased 0.5 per cent in May after two months of declines.

The FTSE 100 index closed up just 25.12 points higher at 4,461.87 as banking sector gains were offset by falls in commodities.

Oil companies retreated after recent gains, despite oil prices rising for a third day, above $72 a barrel and hitting an eight-month high in New York on the back of a larger-than-expected drop in US crude inventories.

Findings from the National Institute of Economic and Social Research (NIESR), the leading economic think-tank, that the UK economy could emerge from recession soon gave strength to the pound.

Sterling climbed to its highest level in more than six months to reach €1.174 compared with €1.167 previously.

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US banks to pay back $68bn in rescue funds

Hopes of a return to stability in the bombed out banking sector were raised by plans for ten banks to repay their loans.

Ten bailed-out US banks have been cleared to pay back a combined $68 billion (£41 billion) of government aid in a move greeted by investors as a sign that stability is returning to the sector.

The Treasury said that it had told ten institutions that they had raised enough new capital to enable them to repay loans made under the Troubled Asset Relief Program (Tarp).

Several banks, including JP Morgan Chase, Capital One Financial, Morgan Stanley and BB&T Corporation, immediately announced that they would take up the offer.

JPMorgan said that it would repay in full a $25 billion investment along with dividends. Jamie Dimon, the group’s chairman and chief executive, said: “Paying back Tarp at this time is the right thing for JPMorgan Chase, and it’s the right thing for our country.”

Morgan Stanley said that it was “pleased” to pay back $10 billion.

Kelly King, the chief executive of BB&T, said that the group would repay $3.134 billion. “Repaying the government’s investment will give us greater flexibility to benefit significantly from future opportunities that will be available as we emerge from this recession,” he said.

The others said to have been cleared were Goldman Sachs, Bank of New York Mellon, Northern Trust, State Street, American Express and US Bancorp. Many of the banks had winced at the restrictions accompanying the bailout funds, such as limits on executive pay.

The Treasury said in a statement that the repayments “follow a period in which many banks have successfully raised equity capital from private investors”. Timothy Geithner, the Treasury Secretary, said: “These repayments are an encouraging sign of financial repair but we still have work to do.”

US shares were flat on the news as investors fear that an oversupply of government debt could push interest rates higher. The Dow Jones industrial average inched up by 1.43 points or 0.02 per cent to 8,763.06.

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IMF tells Europe to come clean on bank losses

The International Monetary Fund has called on eurozone governments to take urgent steps to clean up the banking system as losses mount, and advised the European Central Bank to prepare "all unconventional options" in case the crisis deepens.

"To restore confidence, you need total disclosure of possible losses," said Dominique Strauss-Kahn, the IMF's managing director. "Not only losses which are linked to the original sub-prime crisis, but also the losses linked to the slowdown in the economy, and impaired assets."

The latest IMF report said the chance to raise fresh bank equity while optimism lasts should be "seized without delay" and demanded a "comprehensive review to assess capital needs and viability."

"Stresses persist, conditions for access to bank lending are tight, funding costs remain high. Sizeable losses lie ahead as the recession unfolds. The financial sector is hamstrung in fulfilling its vital intermediation role."

The IMF says eurozone banks will need to raise a further $375bn (£235bn), compared to $250bn for US banks, and has called for a stress-test along the lines of the US Treasury probe.

There are widespread concerns that Germany in particular is hiding bank problems until after the September elections, using its "bad bank" scheme to keep "zombie institutions" alive.

The eurozone is not yet out of the woods, and risks sliding into a deeper downturn. "Adverse feedback loops between the financial and real sectors could trigger a protracted deflation," said the fund.

The euro fell sharply, although analysts said Ireland's troubles may ultimately pose a greater risk for sterling for contagion reasons. S&P has threatened to strip Britain of its AAA rating unless London gets a grip on spending. Austria is also in the firing line as concerns grow over bank exposure to Eastern Europe.

Ireland's woes are compounded by the crushing defeat of the premier Brian Cowen's Fianna Fail, which lost all its seats in the EU elections.

In Spain, the government announced a €9bn fund to rescue banks hit by the property crash. PriceWaterhouseCoopers said the sum fell far short of what is needed, fearing that Spain's banks will need at least €25bn and perhaps as much as €75bn in fresh capital. Non-performing loans will reach 7pc to 8pc, double the level in March.

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Sterling slides as pressure on Gordon ditherer Brown remains

Sterling came under renewed pressure on foreign exchange markets on Monday morning as the Labour Party's heavy defeat in the European elections intensified pressure on the liar Gordon Brown.

The results of the European elections, which look set to see Labour trail in third after the Conservatives and UKIP, sent the Pound down by a cent by lunchtime in London.

It weakened by a cent to $1.5880 as dealers in London - where the majority of currency trading takes place - digested the results. The currency also fell against the euro at about 87p.

Sterling has been on the backfoot since a spate of resignations, and last week's local election results intensified speculation about whether Mr Brown can survive in Downing Street. Analysts said that the continued uncertainty is giving dealers good reason to dump the pound.

Investors will be particularly worried that a weakened Government will not be able to drive through the measures required to cut the Budget deficit.

Others caution, however, that the pressure on sterling will be tempered by signs that the UK and the US economies are stabilising after the "free-fall" that marked the six months that sandwiched Christmas. Analysts at Barclays reckon that sterling could claw back to $1.70-$1.80 later in the year.

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Labour's death throes rattle Sterling

Sterling tumbled against the dollar and the euro today on worsening political instability after James Purnell, the Work and Pensions Secretary, stepped down from the Cabinet.

The pound, which this week hit a seven-month high of $1.67, fell by 1 per cent to $1.6031 as Gordon Brown began an emergency reshuffle after the departure of three Cabinet minister this week. One euro is now worth 88.42p.

Despite the downward trend on sterling, blue-chip stocks were positive, with the FTSE 100 lifted by the mining sector.

The leading index gained 69.29 points, or 1.52 per cent, to 4,456.23 in early trading, with Rio Tinto the strongest riser, up 12 per cent to £30.52, after it walked away from a deal with Chinalco, the Chinese state-owned metals group, that had been unpopular with shareholders. Instead, investors will be able to participate in a $15.2 billion rights issue.

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Bank holds interest rate in pause for breath

BoE pegged interest rates at 0.5% today for a third month in a row.

Also stayed its hand over any other changes in its recession fighting strategy as it paused for breath in its battle to combat Britain’s economic slump.

The Bank opted to hold interest rates once more at their 315 year low of 0.5 per cent as it weighs the impact of its expanded £125 billion drive to jump-start the economy with injections of newly created money.

Between last October and March, the Bank drastically cut interest rates and embarked on its aggressive moves to “print money” under a strategy of quantitative easing (QE), involving huge purchases of government and company bonds to pump extra cash through the economy.

The latest glimmers of hope emerged yesterday when the key CIPS/Markit survey of the services industries, the engine room of the economy, showed the sector growing last month, for the first time in more than a year.

The survey’s headline index, which is closely watched by the bank's MPC, rose for a sixth month in a row to its best level since April 2008.

Conditions have also improved in manufacturing, with the parallel CIPS survey of industrial companies showing that, although the sector was still shrinking last month, its fortunes were the strongest for a year.

Other rosy news has come from the high street and the housing market, with retailers ringing up a surprisingly strong 0.9 per cent rise in the quantity of goods sold during April, and indications that the worst of the house price slump has passed.

Yet the Bank will remain on the alert for any signs that the recuperation of an economy that remains frail and vulnerable may falter.

The fragility of any revival was underlined by last month’s official GDP data, which confirmed a 1.9 per cent plunge in the first quarter, the steepest quarterly decline since 1979.

Leading economists also remain extremely worried that any recovery will be anaemic at best and is likely to prove short-lived.

Analysts fear that an upturn will not last as highly indebted households strive to rebuild their finances and as a battered banking sector continues to tighten credit conditions.

"We are currently in a Potemkin recovery — more appearance than reality,” Professor Charles Goodhart told The Times yesterday, in reference to the fake “Potemkin villages” constructed in 18th-century Russia to deceive Empress Catherine II.

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Gloomy data weighs on wise money

Bernanke warns that America must curb its budget deficit

Gloomy housing sector data and continued layoffs led to a subdued Wall Street opening as investors played safe with their profits after a succession of session gains.

Investors were also reacting to a warning from Federal Reserve chairman Ben Bernanke that Congress and the Obama administration must start plotting a strategy to curb record-high US budget deficits.

Failing to do so could eventually erode investor confidence and endanger the economy’s prospects for long-term health, he said.

Testifying before the House Budget Committee, Mr Bernanle said: “Even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance.”

The White House estimates that the government will rack up an unprecedented $1.8 trillion budget deficit this year. That would be more than four times last year’s all time high.

A survey by ADP, a payroll business, revealed that the US private sector shed 532,000 jobs in May - better than 545,000 in April but slightly higher than the 525,000 estimated.

In the UK, the pound gained strength on the release of data indicating a return to growth for the services sector.

The euro recovered slightly from a six-month low against the UK currency and the dollar continued its weak trend, but improved from a morning low to trade at $1.643.

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Pound rises three cents to $1.64

The Pound rose 3.03 cents against the dollar yesterday as a survey indicated the British manufacturing sector could stop shrinking by autumn and hopes were lifted that the worst of the recession was over.

Sterling closed up at $1.6428, the highest level since October 21, and 20pc higher than its lowest 2009 level in January. It also rose 2 cents against the euro yesterday to close at €1.1602.

The pound was helped by the publication of the latest manufacturing Purchasing Managers' Index (PMI), which signalled a better-than-expected improvement in the sector in May.

The PMI rose to a 12-month high of 45.4 in May, up from 43.1 in April. It has been rising sharply since hitting a low of 35.1 in February. A figure below 50 marks a contraction in activity and above indicates a rise.

Production and new orders fell at the slowest rates for 12 and 14 months respectively, with larger companies faring better than small and medium-sized businesses.

Particularly encouraging was the new orders balance, which rose to 48.9 from 46.1 in April, which is likely to trigger a process of restocking following a period when manufacturers rapidly ran their stocks down to reflect the fall in demand.

However, new export orders fell at a faster pace in May, measuring 45.3 on the PMI compared with 49.5 in April. It is further evidence that a weaker pound in 2009 has so far failed to boost exports significantly, as demand in Britain's key export markets remains subdued because of the global recession.

Unemployment in the sector continued to rise in May but the pace of job cuts slowed, with the PMI employment index rising to 38.9 from 36.1 in February. Unemployment in the UK as a whole is expected to rise above 3 million in 2010.

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Sterling hits six month high against the dollar

Sterling reached its highest level against the dollar in more than six months as it took strength from an improved outlook for the global economy.

The UK currency closed at $1.6155 having earlier reached $1.6183 - on track for its biggest monthly gain since 1985.

Positive economic news from Japan and Germany, sent the dollar tumbling against a basket of currencies.

US stocks traded mainly flat after enjoying a promising start to the session with the release of data from the US Government which indicated that the recession could be on the turn.

Further data dampened earlier optimism with the Institute of Supply Management Chicago showed US midwest business activity slowing severely in May. Another survey showed consumer confidence in May was at its highest level since last September.

Government figures had earlier revealed that the US economy contracted slightly less than estimated in the first quarter. Corporate profits rebounded.

Gross domestic product, or total goods and services output within the US, dropped at a 5.7 per cent annual rate, the Commerce Department said, less than last month's 6.1 per cent government estimate. The economy contracted by 6.3 per cent in the fourth quarter.

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Sterling buoyed with positive house price data

Lots of positives in the global markets this morning and for sterling.

Firstly we have seen the Nationwide House price index survey show a surprise bounce as the average house price rose 1.2% in May- this is the strongest monthly gain for 19 months.

Although this is a good indicator that the severe downturn in the property market may be bottoming out- Nationwide noted that it is still too early to call as unemployment is still rising and credit conditions remain tight.

Sterling was also buoyed by UK consumer confidence matching its highest level in 11 months reported market researcher GfK NOP…the CBI also reported that business sentiment rose to the highest level since 2007.

Sterling is now pushing towards 1.61 against the dollar (a new 2009 high) and 155.00 against the Yen- we could see new yearly highs very soon on the EUR and for sterling on a trade weighted basis.

In the wider markets we have seen more leveraging into Oil and Gold which both rose sharply- Gold is closing in on $1,000/oz again and Oil has hit a new 6 month high above $65 a barrel. Commodity prices have leaped this month as a move out of the dollar and Yen mirrors the improved confidence and a move from safety to investments.

We have seen major gains in commodity based currencies particularly against the USD- with the CAD, AUD and NZD all making gains this month.

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Bond markets defy Fed as Treasury yields spike

The US Federal Reserve may soon be forced to launch fresh blitz of quantitative easing whatever the consequences for the US dollar, or risk seeing economic recovery snuffed out by the latest surge in long term borrowing costs.

Yields on 10 year Treasury bonds have risen relentlessly since March when the FED first announced its plan to buy $300bn (£188bn) of US government debt directly, a move that briefly forced rates down to nearly 2.5pc, a level thought to be the Fed's implicit target.

The US Mortgage Bankers Association yesterday highlighted the fragility of the US housing market, reporting that 12pc of homeowners are either behind on their payments or facing foreclosure, the highest level since records began.

Almost 6pc of "prime" borrowers are in arrears, showing how far the crisis has moved beyond the sub-prime. Most arrears are caused by job losses. The US unemployment rate has reached 8.1pc, and is even higher under older definitions, running at 15.8pc under Clinton-era metrics.

It is unclear why US bond yields have spiked so violently, with spill-over effects on gilts and bunds. One camp of investors is worried that inflation is rearing its ugly head again: others fear a sovereign debt crisis as over-extended states loses their AAA ratings.

The US is at the front of the firing line. Beijing is clearly losing its patience with the Fed's policy of printing paper, seen as a form of stealth default. There is some risk that further moves to step up quantitative easing could cause China to boycott US Treasury auctions. China and Japan together hold 23pc of all US federal debt.

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Wise Money warns Britain may suffer a double recession

One of the world's most influential economists warns today that Britain faces the prospect of two recessions in quick succession.

Robert Shiller, Professor of Economics at Yale University, said that the recent stock market bounce should be treated with caution.

He likened the current sense of optimism to a marital row. “You don't know whether the argument with your wife is really over or not. Is the problem something that your spouse will bring up again, and again?”

The apparent upturn could soon go into reverse, he told The Times, marking a repeat of economic patterns in the 1930s and the 1980s.

Such a double-dip slowdown has been nicknamed by economists a “W-shaped” recession, where recovery is so fragile, the country could be plunged into another slowdown as soon as it emerged from the last.

Since March the stock market has rebounded by 27 per cent, raising hopes that the recession may not be as severe and protracted as many economists had feared.

Some have interpreted the recent rally as a sign that the banking system - which imploded after Lehman Brothers, the US investment bank, went bust in September - has stabilised and that confidence is returning.

Last week Alistair Darling, the Chancellor, brushed aside doubts that his Budget forecasts had been overoptimistic and predicted that the recession would be over by Christmas. Many economists in the City believe that Britain will stagnate until the end of 2010 and that unemployment will continue to rise well after that.

Speaking to The Times this week, Professor Shiller said: “I was last here [in London] in the fall and there is definitely a sense of optimism now. The Fed [US central bank] and the Bank of England seem to have things under control. Everything seems to be getting better.”

However, he warned that “there is a real possiblity of another recession. We may well see more bad news. It is a real failure of the imagination to think otherwise.”

He said that there were a number of issues that threatened any long-term recovery for the British economy - rising unemployment, mortgage defaults, and another wave of new company failures that “could surprise us yet”.

Professor Shiller also said that the banks were still harbouring large portfolios of troubled assets.

“We all want to lick this problem — there's been a burst of confidence over the last few months, but really it's not based on any news. A lot of people think this recession is coming to an end. But I'm not so sure. A resurgence in confidence may not translate into new jobs. We are still in uncertain times.”

He added: “In 1931 in the US, President Hoover unveiled his recovery plan - there was a huge stock market rally — the market improved but it didn't hold because bad news kept coming in. Increased confidence can be a self-fulfilling prophecy but it doesn't always hold.”

Professor Shiller said, however, that he believed another likely scenario to be one where Britain would face a continuous decline with house prices falling for a number of years, drawing comparisons with the decade of misery in Japan in the 1990s.

The economist became well known when he predicted the timing of the end of the dot-com boom in March 2000, and was one of the first to warn that the US housing market was perilously overvalued and that its collapse would cause devastating reverberations across the world's biggest economy.

Professor Shiller has been in London this week promoting his book Animal Spirits. How Human Psychology Drives the Economy and Why it Matters for Global Capitalism, in which he argues that our own psychology and emotions, such as envy and resentment, drive house prices, debt levels and share values.

His co-author is George Akerlof, who won the Nobel Prize for economics in 2001. In the book, they argue: “What had the people been thinking? Why did they not notice until real events — the collapse of banks, the loss of jobs, mortgage foreclosures — were already upon us. The public, the Government and most economists had been reassured by an economic theory that said that we were safe. It was all OK.

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Asian shares founder after North Korean nuclear test

Asian stocks foundered on Tuesday as the United Nations condemned North Korea's nuclear test and investors awaited more clues about the health of the world economy.

Major markets like Japan and South Korea drifted lower, while the dollar fell against the yen and oil prices slackened.

Tensions on the Korean Peninsula showed no signs of easing after the UN Security Council criticized North Korea's test of a nuclear bomb as a "clear violation" of international bans. But the country's defiance continued with reports saying it would likely step up its weapons testing by firing short-range missiles this week.

While hurting sentiment in the short term, the standoff was more an excuse to take a breather from the recent rally, analyst said.

Caution ahead of upcoming economic reports in the US, as well as Wall Street and British market holidays Monday, also left investors with few reasons to set a course one way or the other.

Japan's Nikkei 225 stock average fell 19 points, or 0.2pc, to 9,327.82, while Hong Kong's Hang Seng rose 19.91 points, or 0.1pc, to 17,141.73 in an erratic session.

In South Korea, the Kospi was off 2.4pc at 1,367.02. The benchmark dived over 6pc on Monday on news of North Korea's nuclear test before recovering nearly all its losses.

Elsewhere, Shanghai's index lost 0.1pc, Australia's benchmark was up 1.1pc and Taiwan's market dropped 0.8pc.

Both US and British financial markets were closed Monday for holidays. European markets finished little changed on Monday.

With investors eyeing key US economic reports this week, including home sales, big-ticket manufactured goods and consumer confidence, Wall Street futures pointed to a slightly lower open on Tuesday.

Oil prices fell Asia trade ahead of OPEC's meeting this week, with benchmark crude for July delivery trading at $60.93 a barrel, down 74 cents from overnight trade.

The dollar slipped to 94.66 yen from 94.84 yen, while the euro was lower at $1.3976 compared to $1.4003.

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What a difference an "A" makes

Yesterday we saw incredible volatility in the markets as firstly Standard & Poor’s said it was revising its outlook for Britain’s AAA credit rating from "stable" to negative.

This had a whirlwind effect on the markets with the FTSE falling nearly 3% and sterling tumbling across the markets. Official data showed that the treasury borrowed £8.5 billion last month and the S&P warned that the debt rating would be downgraded if the next governments’ fiscal plans do not show a secure downward trajectory in the medium term.

A downgrade would be a huge blow to the status of Britain and would lead to the Treasury being required to pay higher interest on future borrowings. Sterling weathered the initial dip of 2% against the US Dollar and 1.5% against the Euro and retraced back to earlier highs of 1.58 against the USD in later trading and gained some of its losses back on the Euro.

Moody’s later informed the market that they had no plans to change their current rating of AAA and stable helping the pound. The response from the UK government and head of the DMO affirmed "There are significant uncertainties in the global economy at the present time and S&P point out that the outlook could be revised back to stable 'if fiscal outturns are more benign than currently (they) currently anticipate'," – let us hope Mr. Darlings growth forecasts are correct!

Sterling’s gain back against the US dollar was also helped by worries that the US will eventually face the same fate of a credit downgrade with its spiraling budget deficit and weakening economy.

Bill Gross the co- CEO of PIMCO a large bond firm told Reuters that investors fear the US is "going the way of the UK-losing AAA rating, which affects all financial assets and the dollar", the growing fears sent the dollar tumbling as risk aversion encouraged investors to seek new harbours- the YEN and the EURO the initial favourites.

EUR/USD is now approaching the 1.40 level and is still looking bullish. The decline in the dollar comes amid rallying commodities, equities and corporate bonds, initially the increased confidence in the markets encouraged the "safe haven" dollar to be sold, however now the dollar seems to be losing its shine as a safe haven.

The dollar index which tracks the US currency against a basket of currencies has fallen to its lowest level since December 29 and has technically broken out of its upward range. Expect to see more dollar weakness with neither risk appetite or risk aversion being dollar positive.

In other news data today confirmed that GDP in the UK dropped 1.9% in the first quarter of this year- this was exactly in line with forecasts and has not moved the markets. Japan has upgraded its economic outlook and is forecasting that exports are forecasted to pick up- this follows a massive fall in exports in Q1 and a 4% fall in output- this should be Yen positive as it underlines the safe haven status of the Yen and will encourage more Yen leveraged carry trades- particularly into AUD.

Finally the Indian Rupee advanced on sentiment that Prime Minister Manmohan Singh will look to sell state assets and attract foreign investment- the INR made its biggest weekly gain against the USD since March 1996.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

UK Taxpayer faces £17.6bn loss on bank investments

The UK taxpayer would make a £17.6bn loss if the labour Government sold out of Lloyds Banking Group and Royal Bank of Scotland at today's prices.

The figures, compiled by analysts at Exane BNP Paribas, make even a partial sale of the Government's stake in either bank before a general election next spring look highly unlikely.

The analysts calculated that the state's holding in Lloyds is £10.9bn underwater and £6.7bn out of the money at RBS.

"We continue to view UKFI [the body managing the investments] as a (very) long-term shareholder," Exane's Ian Gordon said. "We assume that the test likely to be applied by UKFI is one of absolute return to (at least) break-even. That could be a long wait."

UKFI has said it expects to sell the stakes piecemeal back to the market as soon as possible. The taxpayer owns 43.4pc of Lloyds, acquired at an average of 124.55p, and 70.3pc of RBS, bought at 51.21p. The stakes rise to 62pc and 95pc respectively once the "B" shares used to pay for the toxic debt insurance scheme are included.

Lloyds shares yesterday fell 6.09 to 70½p after adjusting to take account of its £4bn placing and open offer. RBS, which announced 700 job losses in IT and property yesterday under plans to cut around 20,000 staff globally, fell 0.7 to 42.4p.

Some of the potential losses in Lloyds could be recovered sooner, though, after the lender warned the Government might renegotiate the terms of the asset protection scheme (APS). In the prospectus, the bank said: "Negotiations are continuing and, although not currently expected by the board, may result in changes to the terms announced on March 7."

The Treasury sought to downplay the warning, saying: "The Government is now undertaking a detailed examination of the assets and will announce final details in the coming months. We have not changed our initial assessment of the overall taxpayer exposure."

The prospectus further revealed that European regulators could force Lloyds to unpick its merger with HBOS. In return for state aid approval, the EU may demand "the cessation or disposal of certain parts of the business [that] ... could require the group to divest or exit core businesses".

Lloyds was outlining potential risks ahead of the placing and open offer to redeem the £4bn of preference shares the Government took as part of last October's bank recapitalisation. It is issuing 10.4bn shares at 38.43p – a 54.6pc discount to the closing price on May 13.

Lloyds is paying the Government an underwriting fee of £60m and covering its legal costs of £30m. The taxpayer will make a further £40m as the terms of the deal are that the preference shares are redeemed at 101pc of the issue price.

The £100m the Government will make on the deal comes on top of the £995m in profit the Bank of England has made from its emergency support packages for the financial system, but will have little impact on the billions of potential losses.

Lloyds said converting the preference shares into stock will remove the annual £480m cost of paying dividends on the stock, and "will thereby improve the group's profitability, cashflow, liquidity and organic capital generation".

It will add 0.8 percentage points to its core tier one capital, taking the ratio to 6.7pc before the effect of the APS, which is expected to lift the ratio to 14.5pc.

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Wise Money sees feelgood factor returns

Overnight the UK government has hinted it may look to sell a portion of the debt it has taken on in the nationalised UK banking sector this has seen sterling surge 2 cents against the US$ to levels not seen since December 2008.

Over in the US the feel good factor continues as the Treasury Secretary Geithner adds to the growing belief that we have turned the corner.

This, added to bullish global economic data and further comments from the US gave the Stock Markets a real boost, pushed the oil price up above $60 per barrel again and caused the Dollar to ease against the majors.

Positive data included a rise in Japanese consumer confidence and better than expected export figures from the EU.

We then got ‘reasonable' numbers from the US including strong trading performance from Lowes, a major company whose business is directly related to the house building industry.

Financial stocks added to the positive sentiment following news that Goldman Sachs, Morgan Stanley and JP Morgan had applied to the Treasury for permission to repay their TARP borrowings.

The Reserve Bank of Australia gave a moderate assessment of their domestic situation and questioned the need for a further cut in their interest rates at the May meeting. AUD strengthened slightly following an earlier dip on the Chinese steel directive.

And in a further sign of a global shift away from the US Dollar as a trading medium, Brazil and China have agreed to work towards using their currencies in trading transactions rather than the greenback.

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Bank of England makes £1bn profit from bailouts after riding to rescue of high street lenders

The Bank of England revealed yesterday that it had racked up record profits of almost £1 billion in the year to February as its fee earning activities burgeoned amid the global financial and economic turmoil.

During a crisis that has brought some of the mightiest forces in global banking to their knees — and some to collapse and oblivion — the Bank emerged as having thrived while famed commercial institutions foundered.

Figures released yesterday in the Bank's annual report showed that in the 12 months to February 28 it raked in profits before tax of £995 million. This marks a more than fivefold rise from £197 million in 2008 and is the biggest figure since its establishment in 1694.

The profits surge for the Old Lady of Threadneedle Street has already paid a big dividend for taxpayers. The Bank made an initial payment to the Treasury of £203 million on April 3 and a further, similar sum is set to follow in October under rules that require the Bank to hand back a quarter of its post-tax profits to the Government on two dates each year.

The Bank's soaring profits have come as a direct result of its massive interventions to shore up Britain's banking system, as it has levied fees and interest on stricken high-street and commercial banks in return for the financial lifelines that have seen them through the financial storm.

“The Bank's profit is a consequence of policy decisions to tackle the financial crisis,” a spokesman said last night after its report was handed to Parliament.

“The Bank has provided substantial liquidity support to the banking system. It is entirely right it charges fees to set the right incentives for financial institutions to use its facilities and protects itself and taxpayers from potential credit risk.”

Yesterday's report showed that included in the year's bumper profits for the Bank were £7 million earned through its support for the collapsed Bradford & Bingley and a further £4 million from its backing for the failed Northern Rock.

The Bank has also earned large amounts from the £185 billion loaned to banking groups in the form of Treasury bills, under its Special Liquidity Scheme (SLS). In the year to February 28, it booked £664 million in profits related to the SLS, according to its accounts.

As security for its loaned funds, the Bank continues to hold £287 billion-worth of hard-to-trade, illiquid assets that it swapped under the scheme.

Mervyn King, the Bank's Governor, joined Sir John Parker, chairman of its Court, in using the annual report to renew calls for extra powers for the Bank to help to prevent future crises.

Mr King said that he welcomed the extra statutory role given to the Bank to ensure financial stability, but added: “I regret that the new responsibility has not been accompanied by any new powers to deal with banks before they fail. Responsibilities and powers need to be aligned.”

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Wise Money doubts that this bull market has legs

It was only a fortnight ago that investors were buzzing with enthusiasm and dreaming of a bull market.

Stockbrokers were reporting a sharp rise in trading volumes as private investors rushed to join in the stock market renaissance.

The great and the good were confident enough to announce that the bull market had indeed come.

Doubts are being raised as to whether this is the bull market we had been hoping for. Certainly the FTSE 100 has struggled to get into top gear since and although the wheels haven't come off, it has run out of gas.

London's index of leading shares may have jumped 25pc since hitting a low of 3,512 points on March 3, but it closed the week down at 4,348 – its first weekly decline for several weeks.

The stock market chartists also suggest that it is a tad early to call time on the bear market. Take the Coppock Indicator, which aims to identify the start of a bull market.

The Coppock indicator signalled rallies in 1988 and 1994, and investors who acted on it made a lot of money (although it gave a false signal back in the early stages of the dotcom bust).

It was first developed more than 40 years ago when church authorities asked Edwin Coppock, a business economist, for a low-risk, long-term signal for use on the Dow. Coppock believed that, in the markets, collective emotion outweighed collective reason and investors panic-sold to avoid losses.

He asked the bishops how long it took to recover from bereavement or similar trauma. They said between 11 and 14 months, so using the Coppock Breadth Indicator he would judge the momentum of the markets based on the average of their 11- and 14-month rates of change.

The confirmation or buy signal comes when the indicator is below zero and turning upwards from a trough.

We point out that the indicator has yet to provide a buy signal. W warns that it is too early to shout "Yippee, the bear market's over."

The dividend cut by BT, not to mention its redundancies, reminds us that troubles run deep in corporate Britain. And given the cautious overtones in the latest Bank of England quarterly inflation report you can understand that the majority of investors remain sceptical that this bull market has legs.

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IMF forecasts recovery despite Eurozone GDP fall

The head of the International Monetary Fund (IMF) said today that he expects the global economy to recover in the first half of next year despite worse than expected figures from the eurozone economy showing that GDP shrank by 2.5 per cent during the first quarter.

The quarterly fall in GDP in the eurozone– a key measure of economic health – takes the annual decline to a record of 4.6 per cent across the 16 countries that use the euro.

Germany revealed the worst fall in GDP, shrinking 3.8 per cent over three months in its worst performance since reunification in 1990. Economists had forecast German GDP would contract by 3 per cent.

However, the IMF's Dominique Strauss-Kahn said that green shoots of revival are everywhere but he stressed that banks’ balance sheets must be cleansed before an economic recovery can take place.

While today’s figures are far worse than expected, economists said the quarter would prove to be a low point, with the slowdown set to ease in the coming months.

France, Europe’s second-biggest economy, reported that GDP shrank by 1.2 per cent on the quarter while Italy, the next biggest, fell 2.4 per cent.

Much of Germany’s contraction was due to a sharp decline in exports, which make up a large proportion of the country’s economy, and a drop off in investment. The dramatic plunge in output was the fourth quarter in a row that Germany’s economy has shrunk.

Moreover, officials said fourth quarter GDP, which was previously the worst on record, was revised down to a contraction of 2.2 per cent, compared with the previously reported decline of 2.1 per cent.

Germany is now expecting a 6 per cent contraction this year and is predicting growth of just 0.5 per cent in 2010.

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UK green shoots are trampled by Mervyn King

Sterling has slumped lower following yesterday's Quarterly inflation report by the Bank Of England emphasising a slow and uncertain recovery.

The inflation report is the first since the introduction of QE in March and the report was eagerly awaited to assess the inflation projections in the UK. Mr King was downbeat in his assessment of the UK economy and emphasized the uncertainty in the economy stating "it would be extremely unwise for anyone to claim they know what the future is to hold" and he also intimated that there would be no end to credit easing and interest rates will remain low for the foreseeable future.

So not particularly cheery from Mr King and this certainly takes the shine off yesterdays "green shoot" declarations from various economic pundits for the UK- in fairness a conservative approach is sensible to avoid the market trading on sentiment rather than reality.

Following the report sterling dipped from 1.53 against the dollar to 1.5139, against the euro sterling dropped from 1.1190 to 1.11. In other data from the UK we saw unemployment jump to its highest level since 1996 in a leaked report yesterday afternoon….the number of UK unemployed jumped by almost a quarter of a million in the first 3 months of the year taking the total levels to 2.2 million.

However manufacturing production fell by just 0.1% compared to expectations of a drop nearer to 1%- continued improvement in manufacturing production will be essential to drive growth and stop the rot of unemployment levels surging higher still…

Elsewhere, we saw China post a higher than forecast retail sales number but lower industrial output data….good news that the Chinese consumer is buying but they will hope to see an improvement in output soon.

One currency pair to watch is EUR/USD which earlier broke through 1.37 before retracing to 1.36- the increase in Oil to $60 per barrel driving this pair higher for now.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Bout of profit taking snaps the equity rally

As Wise Money feared, yesterday we witnessed a sharp bout of profit taking in the equity markets as investors took the opportunity to lock in their profits after a 5% rally last week.

The move may have been catalysed by the fact that several large US banks were looking to use common equity issuance to raise funds in order to repay borrowings from the Government.

In addition Ben Bernanke then seemed to put a short term top on the market surge by focusing on the dangers of inflation and the timing of an increase in interest rates by the Federal Reserve. HSBC also released results that although in line with expectations, failed to impress the markets.

The knock on effect in the currency markets was a swing back into the USD and YEN and selling pressure on all the higher yielding currencies especially the AUD and the ZAR.

This view was echoed by Mr Soros who stated that "the economic freefall had been stopped", in fact there was a plethora of declarations of recovery yesterday…Deutsche Banks George Buckley indicated that the UK output could grow again by June.

In addition the Organisation For Economic Cop-operation and Development (OECD) said Britain was one of the countries showing "tentative signs" of a pause in the pace of decline - the OECD generally has a good record of identifying turning points.

Other sterling positive news came in the form of the RICS house price index improvement to -59.9% in April from -72.1% in March and BRC retail sales showing the largest year-on-year rise for 3 years at +4.6%

The pound has gained to 1.52 against the dollar and is also making gains against the euro in early trading…the currency markets continue to be equity driven and with confidence increasing look for more selling pressure on the dollar and the Yen and gains in sterling and commodity currencies such as the Australian Dollar and South African Rand.

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UK ministers 'to blame' for financial crisis

UK Governments and central bankers must take the blame for the financial crisis - not bankers, investors and others in the market, according to a new study.

The Bank of England has a whole variety of counter-cyclical policies it could have used to avert the crisis, say economists.

In a comprehensive analysis of the causes for the financial and economic crisis, the Institute of Economic Affairs (IEA) has concluded that the disaster was caused by authorities' mistakes rather than market failures.

In an associated letter to The Daily Telegraph, the IEA, supported by a number of leading economists, including Tim Congdon and John Kay, said that despite these failures regulators were being rewarded with more responsibilities.

The study suggests that hedge funds and tax havens should not be unduly punished, and that in the future central banks and regulators should pay greater attention to imbalances building up in the economy.

The detailed analysis, Verdict on the Crash, will come as a further blow for Gordon Brown, claiming that the system he created to monitor the financial and economic system was found entirely wanting and is in need of a major overhaul.

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Wise Money cautions to expect a sucker punch

Wise Money warns the 40pc rise on global bourses since March assumes that central banks have conjured away the debt overhang by slashing rates to zero and printing money.

Nothing of the sort has occurred. Two thirds of the world economy will be in deflation by July.

Bear market rallies can be explosive. Japan had four violent spikes during its Lost Decade (33pc, 55pc, 44pc, and 79pc). Wall Street had seven during the Great Depression, lasting 40 days on average. The spring of 1931 was a corker.

James Montier at Société Générale said that even hard-bitten bears are starting to throw in the towel, suspecting that we really are on the cusp of new boom. That is a tell-tale sign.

"Prolonged suckers' rallies tend to be especially vicious as they force everyone back into the market before cruelly dashing them on the rocks of despair yet again," he said. Genuine bottoms tend to be "quiet affairs", carved slowly in a fog of investor gloom.

Another sign of fakery – apart from the implausible 'V' shape – is the "dash for trash" in this rally. The mostly heavily shorted stocks are up 70pc: the least shorted are up 21pc. Stocks with bad fundamentals in SocGen's model (Anheuser-Busch, Cairn Energy, Ericsson) are up 60pc: the best are up 30pc.

Teun Draaisma, Morgan Stanley's stock guru, expects another shake-out. "We think the bear market rally will end sooner rather than later. None of our signposts of the next bull market has flashed green yet. We're not convinced the banking system has been fully fixed," he said

Mr Draaisma said US housing busts typically last nearly about 42 months. We are just 26 months into this one. The overhang of unsold properties on the US market is still near a record 11 months.

He expects the new bull market to kick off later this year – perhaps in October – anticipating real recovery in 2010.

Governments need to raise $6 trillion (£4 trillion) this year to fund bail-outs and deficits, led by this abject isle with needs of 13.8pc of GDP (EU figures). China fired a warning shot last week, saying the West risks setting off "inflation for the whole world" by printing money. It hinted at a bond crisis.

Yes, the glass is half full. China's PMI optimism gauge has jumped back above the recession line. The global PMI has been rising for seven months. But this usually happens after a crash as companies rebuild battered inventories for a quarter or two.

Note that container volumes in Shanghai fell 17pc in January, 22pc in February, and 9pc in March. Rail freight volumes in the US were down 32pc in April on a year earlier.

The Economic Cycle Research Institute (ECRI) says the US recession will be over by summer, insisting that its leading indicators have never been wrong – except once, in the Great Depression. Quite.

SocGen's other bear, Albert Edwards, says the new element in this slump is that GDP is contracting in "nominal" terms, not just real terms. Money incomes are flat. It is a crucial difference.

"This is like drinking hemlock. The US is gradually slipping further towards outright deflation, just as Japan did," he said. As companies retrench en masse they risk tipping the whole economy into Irving Fisher's "debt deflation trap".

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European Central Bank falls into line and embraces quantitative easing

ECB falls into line and embraces quantitative easing by following the policy first adopted by the Bank of England and America's Federal Reserve.

The European Central Bank has cut interest rates a quarter point to a record low of 1pc and embraced quantitative easing (QE) for the first time, catching markets off guard with plans to buy €60bn (£53.5bn) of covered bonds.

The hotly-disputed move to purchase assets brings the ECB into line with the central banks of the US, Britain, Japan, among others, that have begun "printing" money to stave off debt deflation.

The step-change in policy follows an open clash within the ECB's governing council over its handling of Europe's worst slump since World War Two, pitting national governors from southern Europe and Ireland against the ECB's German-led hawks. Bundesbank chief Axel Weber has fought a rearguard battle to head off QE, calling it an "undesirable option" that risked inflation later.

The majority also overruled his insistence on a 1pc "floor" for interest rates. Jean-Claude Trichet, the ECB's president, said the bank had not ruled out further cuts, "depending on future circumstances".

The refusal to accept Frankfurt's lead is a turning-point for ECB, which inherited its authority a decade ago from the Bundesbank. The upsets touches on a raw nerve in Germany where critics have always suspected that EMU would turn "soft". It may set off a political backlash.

The ECB also extended its liquidity scheme from 6 to 12 months and opened its window to the European Investment Bank, giving it a new crisis role.

David Marsh, author of The Euro - The Politics of the New Global Currency, said the ECB is loath to follow Anglo-Saxon banks in purchasing government bonds because this would give most help to big debtors such as Greece and Italy. "They don't want to be seen as bail-out merchants by acting as a bond purchaser of last resort for hard-pressed nations," he said.

The IMF says Europe's banks have written down just 17pc of likely losses, compared to half for US banks. They may need $500bn in fresh capital. "If the IMF is correct, the risk of a credit crunch is bigger than the ECB likes to admit," said Mr Annunziata.

The European Commission has slashed its eurozone forecast to minus 4pc and highlighted the danger off a more vicious downward spiral if "adverse non-linearities" take hold. "One cannot exclude the risk of social and political unrest," it said.

The ECB's policy shift is a vindication for Cypriot governor Athanasios Orphanides, a 17-year veteran of the US Fed, who has battled tenaciously for bold action.

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US stress tests of banks a focal point for Wise Money

The results of the US banks stress testing is expected tomorrow after the markets in New York close.

This is to be followed by a press conference from the Banks involved on Friday at which one would assume, they will argue their opposition to the findings. Rumours and articles abound this morning concerning Bank of America with estimates that the Bank will be ‘asked' to get hold of $34 billion of fresh capital following the stress testing.

This is about 3 times the original expectation and raises concerns over the total amount that might need to be raised by the other 9 major banks involved. This invoked a move away from riskier currencies and perversely into the US Dollar which enjoyed an afternoon of demand. Equity markets were subdued with a small drop in the DOW recorded.

The original stated purpose of the stress tests was to increase confidence in the US banking system, but the market feels like the end result has been almost exactly the opposite.

Sterling has rallied nicely against the dollar on the back of better than expected UK services PMI data for April, which rose to 48.7 from 45.5 in March, some way above the median forecast of 46.3.

It is the highest reading since August 2008. The pound is also gaining slowly against the euro ahead of the ECB rate announcement tomorrow.

In the fx markets the overall general sentiment aside from the stress testing is still motivated by equity movements- the recent increase in risk sentiment has definitely helped any currency with yield- the AUD, NZD and ZAR all performing strongly overall recently and the USD and YEN losing ground.

Another mover has been the Canadian dollar which has appreciated 5.5% since mid April- this largely due to Canada holding off the introduction of printing money to buy up debt assets- however a strong currency will dampen the demand for exports in Canada which have already fallen sharply.

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Wise Money radar set on Thursdays ECB rate decision

The European Central Bank (ECB) surprised the markets by only cutting interest rates by 25 basis points to 1.25% last month.

A record low but when compared against the UK interest rates of 0.5% and against the US of 0-0.25% then comparatively still high in the current global climate.

The markets wanted to see more aggressive action amid rising unemployment and shrinking growth and all eyes will turn to the next ECB rate decision on Thursday. It is expected that another 25 basis point cut to 1% will materialize and the ECB may engage in additional "non conventional" measures- basically some form of Quantitative Easing to help the economy.

Stateside, the Fed plans to deliver results of stress tests on US banks to executives today that may show about 10 firms need additional capital to weather a deeper recession. An obvious way for banks to fill their capital requirements is via conversion of preference shares to common shares.

Last week, the Fed delayed the release of the tests that were originally scheduled for yesterday, as banks challenged some of the conclusions. 19 banks have been stress tested. Citigroup and Bank of America were allegedly among the banks found to need additional capital. It is rumoured that both firms disputed the Fed's determination.

Yesterday Citi rose 7.7% and Bank of America 19% after denying it was working of a plan to raise $10bn. I would be surprised if we didn't hear more soundbites about the stress tests. The results are likely to be made public later this week.

GB Pound is performing well testing the 1.50 level against the USD. The last time we were at this level was in mid April. A break above this level opens up the 1.52 level where we saw resistance in early January. GBPEUR has rallied and is currently trading at 1.1270 level, still off the 1.1381 high seen in mid April.

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Wise money markets remain mixed

The good news- UK PMI has risen to 42.9 in April from 39.5 in March, above market expectations of a reading around 40.5.

Also in the UK- net consumer lending has been released to have hit its lowest level on record in March, totalling GBP0.9 billion, from 1.5 billion in Feb.

The Pound has risen on the back of better than expected UK manufacturing PMI, and lowest Net consumer lending on record; Sterling is also on the up against the euro and the Yen since the release- the key levels for sterling to target are 1.5065 on the USD and 1.13 on the euro.

Yesterday's US data was a little mixed which was reflected in the Dollar's performance. The afternoon ended on a high note with the release of a much better than expected Chicago PMI index which showed that new orders were at their highest level for 6-months.

Following a running down of inventories there is showing a need for re-stocking but one must assume that this purchasing would not occur unless there was strong optimism that demand was returning. This bodes well for this afternoon's US ISM result.

The ISM survey is good at reflecting turning points in economic direction and once the indicator picks up, it typically continues to climb steadily. Given this pattern and added to the strength seen in recent regional surveys, the market is looking for a rise to 38.2 from last month's 36.3.

In other news, Mexico’s peso fell for the first time in three days after Finance Minister Carstens said the economy will drop for the next few months, reviving concerns the swine-flu outbreak will deepen a slump. The peso declined 0.9 percent to 13.8407 per U.S. dollar yesterday and the drop was the biggest among the six most-traded Latin American currencies.

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Pendulum again swings towards risk appetite

Yesterday and overnight we have experienced a broad sell off in the US Dollar as a return to global risk appetite kicked in.

GBP/USD is approaching the 1.50 level again after a good start to trading and EUR/USD has tested the 1.3350 resistance level this morning. Last night we had the FOMC decision and as expected interest rates remained unchanged at 0.00- 0.25% and the statement commented that rates will remain low for "an extended period".

Furthermore the FED stuck to their guns following the March announcement that they will still purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year, as well as $300 billion of Treasury securities by autumn.

A similar theme in euro zone yesterday as we again saw improved confidence data against a downgrading of German GDP to -6.0% vs. -2.25% originally forecast. The euro is trading higher however as sentiment and focus on the improved confidence data helped the currency.

We also need to remember that the euro interest rates are higher than the UK, US and Japan and the increased risk sentiment into yield will help the euro. We can see similar gains when looking at other higher yielding currencies such as the AUD and ZAR which have all posted gains- particularly impressive is the ZAR- the USD against the ZAR has weakened from levels over 10 recently to 8.5 currently.

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Flu pandemic could wipe 7pc off UK economy, warns Bank

A flu pandemic could wipe more than 7pc off Britain's economic output, and trigger the worst recession since the early 1920s, according to Bank of England calculations.

Not only would it cause a permanent dent in Britain's economic growth, it would see such significant losses to banks that it could trigger further bank nationalisations. It could also be a fatal blow for insurance groups.

However, Bank insiders said that with the financial crisis having already struck the economic and banking system, some of the hit to activity may already have been absorbed by markets and consumers.

However, other analysts have warned that the impact would be even more fierce coming at a point when the economy and banking sector are already so fragile.

The figures come from an exercise originally carried out by the Bank before the financial crisis two years ago. Fearing that a pandemic related to avian flu was one of the possible risks for the City, the Bank and Treasury carried out an unprecedented simulation with banks and firms.

The projections are based on 25pc of the population falling ill as the pandemic attacks the UK in two waves, in line with the Department of Health's planning assumptions, which still stand. But they were also made at a time when banks' balance sheets were particularly fat, so they may exaggerate the scale of the decline.

The exercise concluded: "The most immediate effect would be financial market turbulence, as investors assessed the potential economic impact. Growing absenteeism could affect operations at major financial institutions and infrastructure providers.

Over time, credit losses for UK banks could increase as a contraction in activity, both domestically and abroad, leads to financial distress among households and companies. Banks' incomes would also fall as a result of lower lending volumes and financial market activity.

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Stock markets in Asia remain under pressure

Stock markets in Asia, already buffetted by concern over an outbreak of swine flu, remained under pressure after a report that Citigroup and Bank of America will need billions of dollars of new capital.

The Wall Street Journal reported today that US regulators have told Bank of America and Citigroup that early results of the stress tests show they may need to raise billions of dollars in new capital. Banks across Asia fell, with National Australia Bank declining 3pc.

“You’d think that most banks could pass the stress tests, but if even these two fail, what it tells investors is that the situation could get much worse,” Chris Leung, a portfolio manager at Taifook Asset Management in Hong Kong, which oversees $500m, told Bloomberg.

Elsewhere, Ping An Insurance, China’s second-largest insurer, sank 9pc after reporting a drop in profits. JFE Holdings, Japan’s second-biggest steelmaker, fell 5.4pc after US Steel reported a bigger-than-expected loss.

Fears of a swine flu pandemic produced a rollercoaster day on global markets yesterday, triggering a sell-off in airline, hotel and holiday company shares. However, shares in pharmaceutical companies remained in demand.

In Tokyo, Chugai Pharmaceutical, which sells the antiviral drug Tamiflu, rose for a second day in Tokyo on speculation a swine flu outbreak will boost drug sales.

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Risk aversion trades take centre stage

Swine Flu continues to dominate wise money chatter.

Unfortunately it is the unknown that is causing the problem rather than anything definite and until we know whether the infectiousness of the virus, which originated in Mexico, can be contained by the World Health Organisation then we won't be sure of the financial impact.

The death toll in Mexico has risen to 149 and the WHO has upgraded its alert level to phase 4, one stage below the much more serious pandemic category. Phase 4 was the level at which the latter stages of the SARS outbreak was categorised.

Initially the Mexican Peso and the Antipodean currencies were hit hardest but concerns remain that if the situation worsens then sectors other than just agriculture will be affected.

The mediterranean countries are earmarked as likely targets (Portugal, Italy, Greece and Spain) with a downturn in air travel and tourism at a time that these countries can least afford it.

The Euro slipped sharply, not only on the move into Dollars but also following comments from ECB members Nowotny and Trichet. The former stated that Eurozone rates would stay low for a long time and that the Central Bank was ready to use additional measures if necessary.

Trichet reinforced this message saying the ECB will take decisions on new measures at their May 7th meeting- for the next week or so, the Euro is vulnerable all round.

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Swine flu fears may hit airline and hotel shares

Travel and hotel groups are braced for a turbulent ride today as markets react to fears over the strain of swine flu that was reported to have killed up to 71 people and closed much of public life in Mexico at the weekend.

Analysts said that the news would revive memories of the 2002-03 severe acute respiratory syndrome (Sars) outbreak. Although the disease, first noticed in southern China in November 2002, was short-lived, it caused the deaths of 774 people worldwide and had a devastating impact on the Asian economy — particularly in Hong Kong — and on the shares of many international companies with an economic interest in the Far East.

In Asia, dealers said that any sell-off was likely to be in airline and travel-related stocks until more was known of the extent of the danger posed by the disease and its probable impact on global trade.

One dealer said that markets were likely to reassess their stance if more countries followed Russia’s decision yesterday to ban meat imports from Mexico, some parts of the United States and several South American countries.

Fund managers played down the risks of a swine flu-related sell-off, saying that Asian markets were used to the threat of potential health scares and were more cautious about moving too soon after reports of new disease strains.

Weekend reports in Tokyo suggested, however, that two of Japan’s biggest travel agencies had cancelled package tours to Mexico before Japan’s “Golden Week” holiday season, which begins on Wednesday.

Viewed by travel agents and airlines as the most lucrative seven days of the Japanese year, Golden Week travel activities by the Japanese are critical to many destinations that rely heavily on tourism income.

The mass cancellation of flights to Mexico will be a heavy blow to airlines, though travel agents said that it would be far more significant if Japanese holidaymakers cancelled flights to America as well.

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UK Budget 2009- Britain's debt will not be under control until 2032

The unprecedented burden of UK public debt built up by Gordon Brown will not be brought under control for nearly a quarter of a century, economists have said.

”Debt freedom day”, when the national debt returns to sustainable levels, will not be reached until 2032 - another 23 years away, the respected Institute for Fiscal Studies said.

Families could soon find themselves paying at least another £1,400 a year in tax as part of the Government’s attempts to bring public debt back under control, the IFS predicted.

It said there was a gap between the amount of money that would be raised by the tax measures in this week’s Budget and the amount the Government will need to fund its spending plans.

This secret “blackhole” could end up adding another £1,430 each year to the average families’ tax bill, it said.

The stark warning of a generation of austerity ahead came as Alistair Darling admitted he could not be sure his optimistic forecasts for a quick economic recovery would be realised.

“It is very difficult to be absolutely certain as to what will happen,” he admitted.

The Chancellor’s predictions for growth to resume by the end of this year and to reach boom levels again by 2011 have been widely questioned, with the International Monetary Fund suggesting the British economy would actually shrink next year - despite Mr Darling’s forecast of modest growth. “The crisis is far from over,” it said.

The IFS warned that despite the tax rises and spending cuts announced in the Budget this week, future chancellors would be forced to raise even more money to fill a “breathtaking” long-term hole in the public finances.

The scale of the problem is so great that even with years of tax rises and spending cuts, the national debt will not be low enough to meet Gordon Brown’s now-abandoned “sustainable investment rule” until 2032.

This “golden rule” dictated that Government debt should not rise above 40 per cent of Gross Domestic Product (GDP).

In the Budget however, Mr Darling said he would borrow another £700 billion over the next five years, pushing the accumulated stock of Government debt to £1.4 trillion, equal to almost 80 per cent gross domestic product.

The golden rule on borrowing, which Mr Brown actually announced when he was Chancellor, has been “temporarily suspended” as the UK economy endures the worst recession for 60 years.

Mr Darling has set out plans for debt to peak at 76.2 per cent of GDP in 2013/14. Paying the interest on that debt could cost as much as £58 billion a year by then, more than annual spending on schools in England.

Bringing the debt back to the level Mr Brown once said was necessary for economic stability will take another 23 years, according to Carl Emmerson, an IFS economist. “Public debt will remain high for a generation,” he said.

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Alistair Darling's UK Budget derided as fantasy

UK's Alistair Darling's 2009 Budget has been derided as a stew of unrealistic forecasts and missed opportunities, after the labour Chancellor conceded the current slump is comparable with the Great Depression but insisted it would be over by Christmas.

Mr Darling cemented his reputation as the Chancellor with the worst forecasting record in modern history after he slashed his projection for British economic output this year to -3.5pc.

Unveiling the biggest increase in government borrowing since the Second World War, he conceded that Britain's national debt will double to around £1.2 trillion in the coming years, and that the budget would not return to balance until 2018 or later.

In what economists described as a "fantasy Budget", Mr Darling imposed swingeing new taxes on those who earn more than £150,000, which will raise as much as £5.5bn a year by 2012 – one of the biggest per-capita tax increases in recent history.

But while he will try to trim some departmental budgets, he will nevertheless increase the total amount the labour Government will spend this year and the next by £37.6bn. This indicates that if he does intend to balance the nation's books, he will do so not with spending cuts but with tax rises.

However, the proposed tax and spending measures pale into insignificance against the scale and extent of the economic and fiscal crunch mapped out in the Budget small print.

The documentation reveals that this year's economic contraction will be the worst in any year since the end of the Second World War. Indeed, according to the International Monetary Fund, this year is likely to be the worst since the 1930s, as countries around the world slump into a synchronised slowdown.

The Chancellor predicted that despite shrinking by 3.5pc this year, the UK economy would start growing again "towards the end of the year", with 1.25pc growth next year and 3.5pc from 2011 onwards. Last night economic historians were trying in vain to find examples of developed countries that had stomached so significant a one-off drop in growth and yet managed to recover within 12 months.

As the IMF pointed out last week, recessions associated with financial crises tend to be more protracted and virulent than almost any other type, and that is precisely what the UK faces.

Indeed, alongside many City economists, the IMF expects the UK economy to shrink by a further 0.4pc next year – significantly below even the Chancellor's revised forecasts.

Dig a little deeper into the Budget and it becomes clear that the Treasury expects nothing short of a full-scale consumer recovery – if not boom – in order to satisfy its projections. Such a prospect seems unrealistic if not outlandish, according to City experts.

"It's just wishful thinking," said Peter Spencer, chief economic adviser to the Ernst & Young Item Club. "It's impossible to find a period when that sort of recovery has actually come through … If you believe that, you'll believe anything."

Even taking at face value the Chancellor's forecasts, the UK will have to borrow some £175bn this year and £173bn the next to make up for the shortfall in tax revenues and extra demands on the public purse from increased social welfare spending.

At over 12pc of gross domestic product, these represent the worst years for the public finances since the 1940s. However, the optimistic economic forecasts are doubly significant in this case because higher growth means a lower deficit. Should the Chancellor's economic projections be proven wrong, the eventual outcome for the national accounts will be worse still, according to City analysts, with total borrowing likely to surpass £200bn and not to peak until next year.

"This leaves the already horrendous borrowing projections looking too optimistic," said Ross Walker, an economist at Royal Bank of Scotland. Michael Saunders, chief UK econmist at Citigroup, said: "I shake my head in despair. As the Chancellor faces a terrible fiscal position no one outside the Treasury will believe the forecasts. When I saw the public spending plans I nearly fell off my chair," he added.

The tidal wave of extra debt will push up Britain's net national debt from below 40pc – one of the ceilings set by Gordon Brown in 1998 but since abandoned – to almost 80pc.

The Treasury said it still had no plans to reinstate any fiscal rules to bring its borrowing back under control in the future. In fact, it said it did not expect the budget to come back into balance until 2018 or beyond.

The Budget came amid continuing bad economic news, with the Office for National Statistics announcing that unemployment jumped by 177,000 to 2.1m in the three months to February, taking the jobless rate to 6.7pc.

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UK unemployment hits 2.1m ahead of Budget for jobs

UK jobless numbers swell to the highest since Labour came to power in 1997 as 73,700 more people joined the dole queue.

The number of people out of work rose by 177,000 to 2.1 million in the three months to February, official figures showed today, as Alistair Darling prepared to outline his "Budget for jobs."

New jobs data from the Office National Statistics (ONS) was better than expected with the number claiming benefits rising by 73,700 to 1.46 million in March. The figure is a major improvement on February when the number of people claiming jobseekers' allowance rose by a record 138,400 to 1.4 million.

The figures were unveiled as Mr Darling prepared to unveil a Budget that will include a £2.5 billion package to guarantee work or training for every young person out of work for more than a year.

Thousands more Civil Service jobs will be lost over the next four years as departments struggle to find £45 billion in “efficiency savings” by 2013-14.

Alistair Darling will claim to be introducing a “Budget for jobs” today with a £2.5 billion package that includes a guarantee of work or training for every young person out of work for more than a year. The Chancellor will also back recommendations by five external advisers to find savings by cutting office space, selling property, privatising assets and sharing purchasing contracts across the Government.

The advisers recommend savings starting at £5 billion a year and rising to £15 billion annually by 2013-14. Suggestions include cutting office space by 30 per cent, through hot-desking, halving the size of the Land Registry and preparing the Royal Mint for whole or partial sale.

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Tens of thousands of home owners evicted since labour spin of help

Tens of thousands of home owners have been evicted from their homes since Gordon ditherer Brown first span a package of measures to help them.

Calculations suggest up to 28,000 households -across Britain have had their homes repossessed despite the measures being announced last December.

The Homeowner Mortgage Support Scheme, intended to help home owners by allowing them to delay their mortgage payments, was announced by the Prime Minister with great fanfare at the end of last year as a way of helping struggling families across Britain remain in their homes as the recession took hold.

However, almost five months has passed, and the delay in launching the scheme has meant it is too late for tens of thousand of borrowers who were unable to keep up with their mortgage repayments.

The figures have prompted mortgage experts and politicians to describe the delay in launching the scheme as "outrageous".

They accused the labour Government of trying to "spin a headline" rather than provide genuine help amid the housing slump.

Grant Shapps, the shadow housing minister, said: "The Prime Minister just doesn't seem to appreciate the urgency of the situation in the housing market. People are suffering now, and looking for urgent help.

"The trouble is that home owners believed the hype – and as a constituency MP I'm often approached by people who say they thought there was a scheme out there to help them.

The figures calculated by the Conservatives are based on data from the Council of Mortgage Lenders, which forecasts that 75,000 will be repossessed this year.

But it has come too late for many home owners who have lost their homes during the past five months.

Melanie Bien, of mortgage brokers Savills Private Finance, said: "While the scheme has admirable intentions in trying to save home owners from repossession, it is outrageous that it has taken so long for it to be implemented.

"There has been precious little detail on this scheme from the start and desperate homeowners have been waiting for some clarification: this will come too late for many."

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

US economy facing substantial recessionary risks

The US economy is facing "substantial risks" as the property bust spreads to commercial real estate and the recession engulfs the world, a top White House adviser has said.

Larry Summers, chair of the National Economic Council, said there were signs that worst may be over but warned that "it is a long road and it is going to take time" after the damage inflicted on the financial system.

"There are downside contingencies that we've got to prepare for, issues in the global economy, in commercial real estate. We can't know with certainty what's going to happen next, and there certainly are real risks ahead," he said at the Americas summit in Trinidad.

US house building appears to be stabilising near 500,000 a month, albeit a very low level. The number of new jobless claims has dropped over the last two weeks.

Dominic Wilson, a strategist at Goldman Sachs, said: "There are few clearer signals than this that the market remains highly uncertain about the recovery path and the risks ahead"

Mr Wilson said one year VIX contracts have remained at elevated levels not seen since the Great Depression.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Almost one million UK home owners in negative equity, says CML

Almost one million UK home owners are in negative equity, the Council of Mortgage Lenders has suggested.

It claimed that about 900,000 home owners currently have some degree of negative equity, where the value of their home is less than their mortgage.

Bob Pannell, head of research at the CML, said negative equity had "resurfaced" as house prices have fallen and that it "will contribute to subdued property turnover".

However, the CML said the majority of those in negative equity around two thirds face only modest shortfalls of less than 10 per cent, equating to around £6,000 for those first-time buyers with negative equity, and £8,000 for other home-buyers.

The CML's estimate is less than some economists' predictions that nearly four million home owners are already suffering from the predicament. And it is still less than the 1.5 million households estimated to have negative equity at the depth of the last housing market slump in 1993.

It said: "Falling house prices have once again raised the prospect of negative equity for borrowers. Although negative equity may reduce a household's coping strategies should they encounter payment difficulties, it does not of itself affect the ability to keep up mortgage payments or create a risk of repossession."

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

US housing data dash's Obama's hopes of rebound

The fledgling recovery in the US housing market appears to have stalled, reducing the chance of President Barack Obama's "glimmers of hope" turning into green shoots any time soon.

Stock markets were little changed as US consumer prices posted their first annual decline since 1955. Trader John Cetera of Hamilton Executions on the floor

Hopes of a recovery were also damped down as the US registered its first year-on-year fall in inflation for more than half a century in March, due to falls in energy prices.

Recovery of the housing market is central to the recovery of the US economy, and the latest data puts paid to comments this week by President Obama that he saw "glimmers of hope" in the economy. His views were largely based on earlier housing surveys.

The number of US citizens losing their homes leapt by 44pc last month, as banks pursued delinquent borrowers after federal mortgage lenders Fannie Mae and Freddie Mac lifted temporary bans on foreclosures. A survey by Foreclosures.com found that 175,199 homes were repossessed by lenders in March.

In spite of major banks promising to work with troubled mortgage holders to keep them in their homes, almost 370,000 families have lost their homes so far this year.

The bearish outlook was compounded by the Federal Reserve's Beige Book, which provides an assessment of regional economic activity. It said the US economy continued to weaken in March – albeit at a slower rate – and found that the housing market remains "depressed overall".

Economists played down the chances of the US entering deflation, in spite of the consumer price index falling 0.1pc fall in March, meaning consumer prices are now 0.4pc cheaper than a year ago, the first fall in the annual rate since August 1955.

White House economic adviser Larry Summers warned that "concern about deflation in the nearer term can be entirely discounted."

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Sterling leads the way

Despite yesterday’s trading volumes being severely depleted resulting from the Bank Holiday across much of Europe and the UK; there was plenty of activity - both in the equity and the currency markets.

The Dollar dropped sharply in the Far East on heavy short covering in Euro/Dollar helped by rumours of strong buying from an Asian Central Bank.

The rate rose from 1.3170 to get to 1.3390 before settling at 1.3365 and dragged the other majors with it. Cable moved from 1.4665 to reach 1.4870 before easing.

Sterling however, has tracked higher again following a UK bullish article that appeared in the Telegraph in which the Lombard economist predicts that the UK Housing crisis will end by Christmas.

This will make today’s release of the March RICS housing market survey even more eagerly awaited with expectations of a slightly firmer figure from February’s -78.3% (the lowest figure in more than 30-years).

Survey data suggests that growth in enquiries and viewings have become more buoyant resulting in a modest uptick in sales although financing constraints combined with fears of unemployment continue to hold back any significant recovery in activity.

Sterling however has started this morning’s session on the front foot hitting a 5-week high against the Euro of 1.1198 Other UK data is sparse for the following 3 days with most figures of significance deferred until next week owing to the Easter holiday.

This leaves forex players again watching equity news for direction and we have already seen European markets open firmer with the early release of very strong Quarter 1 figures from Goldman’s.

The Dollar ought to recover some of its recent lost ground especially given North Korea’s comments that they are considering building their own light-water nuclear plant. This could very well weaken the Yen and send the cross back up through 100

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Sterling hits five week high against euro

The Pound hit a five week high against the euro and rose against the dollar on Tuesday as the UK currency was bolstered by renewed demand for London listed equities.

Global risk appetite had been whetted by strong earnings figures from US investment bank Goldman Sachs released on Monday, with sterling benefiting due to the UK economy’s perceived dependence on its banking sector.

The pound, viewed as a riskier currency than the dollar or yen, has tended to gain in tandem with stock markets and analysts at Commerzbank said that sterling should outperform in the currency markets as long as sentiment towards the financial sector continues to improve.

BNP Paribas however said that sterling’s robust performance against the dollar could be challenged if the forthcoming set of first quarter US corporate earnings delivers any shocks.

“Sterling will not be able to avoid the impact of any increase in asset market volatility over the coming week and hence caution with long positions is still required in the near-term,” BNP Paribas said.

“The pace of earnings releases picks up next week and still has the potential to deliver negative shocks. But the pessimism that has been built in to equity markets with many commentators now calling for new lows, is likely to cushion bearish news.”

The pound rose 0.3 per cent against the dollar to $1.4888, and strengthened by 0.8 per cent on the euro to £0.8928. Against the yen the pound was flat at Y148.53.

The dollar meanwhile regained ground against the euro as the wave of post-Goldman enthusiasm was tempered by caution ahead of economic data released later in the week. The euro fell 0.5 per cent against the dollar to $1.3300, but the yen was up 0.3 per cent against the greenback to Y99.76.

“This week’s calendar contains some data releases with the potential to challenge perceptions of improved risk conditions,” said Sean Maloney of Nomura.

“Most notably, US housing starts and permits for March are to be released on Thursday. Big rebounds in these data last time were at the core of some of the ‘green shoot’ arguments that have helped shape recent price action.”

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Doubts on quantitative easing policy as rates keep rising

Once again ditherer brown's incompetence is being highlighted.

It is only a few weeks since quantitative easing programmes were launched on both sides of the Atlantic – but already the effectiveness of the measures is being questioned.

That is because the purchase of government bonds by both the US Federal Reserve and the Bank of England is not helping sustain lower yields.

And it raises the prospect that the central banks will have to increase their fire power.

“The Fed’s problem is that the market realises that $300bn in Treasury buy-backs is just a drop in the bucket compared to $2,500bn in net Treasury issuance this fiscal year,” says William O’Donnell, strategist at UBS. “It’s a $300bn thumb in a dyke springing leaks everywhere.”

After falling to 2.5 per cent from 3 per cent when the Fed confirmed it would start buying Treasuries, the yield on the 10-year note is currently back around 2.9 per cent. This week’s selling of stocks has helped lower yields, but the move has been muted for now.

If 10-year US yields rise above 3 per cent, it may negate some of the recent decline in 30-year fixed mortgage rates, which are at historic lows for US home owners.

In the UK, the effectiveness of quantitative easing is also in doubt, after a euphoric start to the programme that saw benchmark yields plunge.

Yields on 10-year UK bonds have risen by about 50 basis points from a low of 2.91 per cent after the Bank of England announced plans to buy up to £75bn ($110bn) of gilts on March 5.

The increase in yields is partly due to signs of risk appetite returning to the markets, which takes away a natural support for gilts and Treasuries. The recent rebound in equity markets, amid hopes of green shoots appearing in the economy, has also put pressure on government bond prices on both sides of the Atlantic.

The rise in Treasury yields has been accompanied by rising inflation expectations as investors worry that the Fed’s outright purchases of Treasuries and mortgages under quantitative easing will ultimately spark inflation.

The expected average inflation rate for the next 10 years recently touched a six-month peak of 1.5 per cent, up from 1.1 per cent last month. Such an inflation expectation, however, is very low and dealers say supply is the main issue for the Treasury market.

The Fed’s planned purchases in Treasury debt this year is a fraction of the overall $6,000bn in outstanding debt and expected hefty supply due in the coming months and years.

For dealers, competition between the Fed and the Treasury creates a favourable trading environment at a time when dealer ranks have been thinned and bid-offer spreads are wider than normal, enhancing profits.

Trading opportunities have also flourished in gilts as dealers report that most sellers to the Bank of England have been hedge funds or bank proprietary desks. Many of these groups have sold bonds at high prices to the Bank of England and then bought them back at lower prices to book quick profits, which has no impact on the economy.

That is preventing the Bank of England from driving yields on 10-year gilts down to 2.5 per cent, a level where so-called real money accounts, such as life insurance companies, are likely to sell. It is hoped that these funds will then buy sterling corporate bonds, lowering the funding costs for UK companies and helping to stimulate the wider economy.

The rise in UK gilt yields comes amid worries that the Bank of England is not as committed to quantitative easing as dealers first thought following comments by Mervyn King, the Bank’s governor, to a parliamentary committee that the programme could be eased should signs of inflation emerge.

The Bank may make further comments on quantitative easing after its rate setting meeting today.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Recession keeps tight grip on UK economy, NIESR warns

The UK recession kept a tight grip on the British economy in the first three months of the year, a leading economic forecaster warned.

New forecasts from the National Institute of Economic and Social Research (NIESR) estimate that the economy contracted 1.5pc between January and March.

If the think-tank is correct, it would mean the recession remained as severe in the first three months of the year as it was in the final quarter of 2008, when gross domestic product fell 1.6pc.

The gloomy figures reinforced fears that gross domestic product data due to be published by the ONS on April 24 will show that the recession showed no sign of easing in the first quarter.

NIESR added that so far the fall in output has taken a similar path to the recession which began in the summer of 1979. "If the 1980s profile were followed, output would continue to decline for up to another year and it would take two further years before the level of output enjoyed at the start of 2008 would be reached again," it said.

Figures yesterday showed British manufacturing sector shrank the most since records began in 1968 in the three months to February, dragged down by a dwindling car industry.

On a slightly brighter note, the ONS said yesterday that on a monthly basis manufacturing output fell by a smaller-than-expected 0.9pc in February, a significant improvement on the 3pc fall in January and its lowest rate of decline in six months.

Economists had been expecting a 1.5pc fall and said that although the figures signalled another difficult period for manufacturers, the improvement in February suggested the rate of decline was starting to moderate.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

UK data weakest since 1968

UK manufacturing and Industrial production data has been released this morning.

The year on year drop in industrial production is the biggest drop since the series began in 1968. The year on year drop in manufacturing output is the biggest since Jan 1981.

Sterling is down since the data but that is probably due more to falls in the equity markets this morning as bank fears re-emerge.

At the moment there is a close correlation between the movements in stocks and currencies- this is particularly true with the USD, this is again evident this morning as the USD has gained against the EUR and GBP as equities trade lower this morning.

The Irish government is set to announce its budget- the expectation is for higher taxes and less spending…the economy is contracting sharply and its economy boasts the worst deficit in Europe.

The Yen has weakened to 100 against the USD and the Japanese economy will welcome this weakening of the Yen, elsewhere the pound is holding firm at 1.10 against the euro- and the USD is gaining across the board as equities slip.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Eurozone interest rates at record low of 1.25pc

The European Central Bank has cut interest rates in the eurozone to a record low of 1.25pc, down from 1.5pc.

Economists had been expecting a bigger reduction of half a percentage point to 1pc, but speaking at a press conference after the monthly decision ECB president Jean-Claude Trichet did not rule out further cuts.

He said that rates may be cut "in a measured way," adding that while inflationary pressures were subsiding, the outlook for the economy remained poor.

"The latest economic data and survey information confirm that the world economy, including the euro area, is undergoing a severe downturn. Both global and euro area demand are likely to remain very weak over 2009, before gradually recovering in the course of 2010," he said.

The ECB's Governing Council has reduced interest rates by a total of three percentage points since early October, after the global financial crisis intensified following Lehman Brothers' collapse in September.

Mr Trichet said the ECB would announce "non-standard" measures at its policy meeting in May in an attempt to stimulate the eurozone economy, which officially entered recession at the end of last year.

The Organisation for Economic Co-operation and Development (OECD) predicted earlier this week that the eurozone economy would contract by 4.1pc this year. That is a significantly bigger drop than the 2.2pc to 3.2pc fall forecast by the ECB.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Wise Money eyes on the ECB & G20 today

The G20 Conference in London stole the Press Inches but it was the yesterday's economic and trading data plus financial announcements that provided the market with more interest.

Let us start with the Australian Trade numbers for February reported earlier today. As expected, the surplus rose sharply to report a surplus of A$ 2.1 billion as exports rose following a recovery in agriculture plus the anticipated increase in Chinese buying of relatively cheap hard commodities.

The currency remains firm with attention turning to the May budget with hopes of additional stimulus measures being revealed. As a bell-weather for global activity, the Aussie economy is as good as any to watch.

From the US we had several very interesting pieces of news - both good and not so good, but Wall Street ended focusing on the positive and the DJIA closed on an up note, +2.01% higher.

An indication of how slow the recovery of the US economy is going to be is the massive stock building of petroleum products as reported in yesterday Oil Inventory Data Release. The number is running at 4 times the 5-year average and indicates that OPECs best efforts to stabilise their market are not working.

With the ECB meeting scheduled for later today, this might very well leave Sterling as the Buyer's choice (for today anyway) but the European Central Bank have been known to scupper the best laid plans before…..

Earlier this morning, the Nationwide revealed that house prices in March rose by 0.90% month-on-month versus a 1.90% fall in February, this, the first rise in the index since October 2007.

Wise Money suggest an aberration rather than a turning point.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

G20 summit- European demands threaten to wreck deal

France and Germany delivered a late threat to derail Gordon stalinist Brown’s efforts to secure a global recovery deal last night by demanding new concessions from the United States on financial regulation.

In a classic show of eve-of-summit brinkmanship, Angela Merkel and Nicolas Sarkozy joined forces to give warning that they would refuse to sign any agreement that did not meet their “red lines” on tax havens, hedge fund regulation, tracing “securitised” assets sold around the world and capping bankers’ remuneration.

They also wanted the “naming and shaming” of tax havens that refused to go along with tougher regulatory rules, which is being opposed by the United States.

In a reminder of former confrontations between America and the countries of Old Europe, Mr Sarkozy suggested that Europe would not take economic direction from the US. He appeared to suggest that America would have to compromise, adding pointedly: “The crisis didn’t spontaneously erupt in Europe, did it?”

The firm stance of Mr Sarkozy and Ms Merkel and the language used in a joint press conference took negotiators by surprise as they prepared to work through the night on the communiqué to be released today.

Mr Sarkozy has already threatened to walk out of the gathering if he does not get his way and said last night that the German-Franco demands on regulation were “non-negotiable”. Both added that the “new financial architecture” must come today rather than be foisted off to another G20 summit.

Mr Sarkozy said that the summit provided a once-in-a-lifetime opportunity to give capitalism a conscience.He added: “Germany and France will speak with one and the same voice. The objective is a simple one — we demand results; we want hard and fast results.”

Ms Merkel said that the two countries wanted to see “a new architecture and new regulations for financial markets” spelt out very clearly in the final communiqué of the summit. She added: “We have come in a constructive mood. We don’t want results that have no impact in practice but results that change the world as we know it.”

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

German retail sales fall as G22 meets

German retail sales for February have fallen 0.2% against the consensus of a rise of 0.2% this morning reinforcing the weak sentiment in Germany.

Yesterday we saw unemployment levels rise to 8.6% as the powerhouse of Europe comes under real pressure- this will heighten the cause for more action from the ECB tomorrow.

Today, news from G20 participants will dominate although there is a raft of data from the US later the most interesting of which will be the ISM survey. The question that needs to be answered is, does a scenario of very easy monetary conditions translate quickly into an improvement in underlying confidence. I think that given what has gone before, this will not readily happen and that this type of statistic will disappoint for some time to come.

Overnight, the Japanese Tankan was released. The results were mixed but one has say, erred on the weaker side. Business sentiment for both manufacturing and non-manufacturing companies were marginally worse with large and small enterprises both anticipating conditions to deteriorate further during the coming 12-months. the Nikkei remained buoyed however by yesterday's announcement of additional stimulus measures to be pushed through.

Today we are seeing movement on sterling- moving higher against the euro and the dollar and up against the Canadian dollar to 1.82. With added pressure on the ECB we could now see a break back to 1.10.

The OECD, in its global progress report yesterday seemed to support the current mood for although they talk of the UK economy contracting by an eye-watering 3.7%, comparisons with other ‘top' nations make us look performers - US -4%, Italy -4.3%, Germany -5.3% and Japan down a staggering 6.6%.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Tapxpayers left with £600m exposure to cover the failure of Dunfermline Building Society

UK taxpayers are on the hook for as much as £600m to cover the failure of Dunfermline Building Society after Scotland's largest mutual became the first lender to be dismantled under the Government's new "special resolution regime".

Following a deal brokered by the Bank of England and the Treasury over the weekend, the Government will transfer £1.6bn of state funds to Nationwide Building Society, which is taking £2.35bn of Dunfermline's deposits and £250m of treasury investments in return for absorbing £1bn of its prime residential mortgages.

The transfer is being made because the assets Nationwide is assuming are £1.6bn less than the liabilities.

However, the cost will be split between the industry-backed deposit protection scheme and the taxpayer. Both the Treasury and the Financial Services Authority refused to reveal how much the Financial Services Compensation Scheme will cover, but insiders said it was "between £1bn and £1.5bn".

In the worst case scenario, that would leave the taxpayer liable for £600m although any final loss is more likely to be in the tens of millions of pounds.

The labour Government's reluctance to detail either the possible exposure or the potential loss drew criticism from the Conservatives. George Osborne, the shadow Chancellor, demanded to know: "What is the maximum possible loss for the taxpayer? What is the maximum exposure?"

Alistair Darling would only say there was "a small residual exposure for the Government".

However, a further £650m of troubled commercial property loans as well as £150m of toxic self-certified mortgages bought from GMAC and Lehman Brothers has been placed with administrators KPMG.

The Government triggered the special resolution regime, which has been in place just a month, after the FSA judged that it needed £60m more capital to meet regulatory requirements and the authorities decided that "even with an injection of £60m, the society would need to come back for more", Mr Darling said.

The authorities were prompted into action because a £250m floating rate note matured on Monday and the authorities did not want to risk a refinancing failure.

Nationwide is taking over Dunfermline's 34 branches, head office and 534 employees. It has guaranteed there will be no job cuts at branches for three years but is expected to reduce staff numbers in the head office.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

G20 unity spells end of Brown’s New Deal

Gordon ditherer Brown’s plans for a $2 trillion (£1.4 trillion) “New Deal” to revive the global economy have been quietly dropped to preserve the facade of unity as world leaders gather in London for the G20 summit.

The US and Britain have both backed away from spending proposals worth 2pc of global GDP, accepting that each country must find its own way. White House officials confess that there is no chance of a deal that entails further public debt.

“Nobody is coming to London to commit to do more right now. No single number is sacrosanct,” said Michael Froman, the US deputy national security advisor.

British Foreign Secretary David Miliband disowned a leaked draft retaining talk of a $2 trillion boost, insisting that it was an old document that merely lists spending packages already under way across the world. “This G20 summit was never about writing national budgets. Let us not hear that somehow the Anglo-Saxons are for fiscal policy and the other Europeans are somehow for regulation – you have got to do both,” he said.

The pledge to uphold free trade has already been cast into doubt by China, which announced a raft of export tax rebates on Friday to shore up exports.

The protectionist move is likely to irk Washington. There is grumbling on Capitol Hill that the US stimulus is leaking out to surplus states in east Asia and northern Europe which seem to be counting on American demand to rescue the world again.

But the two sides are so far apart in their diagnosis of this crisis that no real agreement seems possible. German Chancellor Angela Merkel said over the weekend that the “German economy is very reliant on exports, and this is not something you can change in two years. It is not something we even want to change”.

Czech premier Mirek Topolanek, holder of the EU presidency, attacked the US fiscal plan last week as the “road to Hell”. Europe’s leaders insist the region is already doing enough since generous unemployment payments – starting at 80pc of earnings in Germany – act as an automatic stabiliser.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

GB economy slows sharper than expected

UK economy slows sharper than expected as construction slumps

Britain's economy slowed even more sharply than expected in the last three months of 2008 as construction output plunged, official data showed on Friday.

GDP contracted by 1.6pc in the fourth quarter of 2008, revised down from a contraction of 1.5pc, the Office for National Statistics reported. The quarterly fall of 1.6pc was the sharpest decline since 1980.

Construction output tumbled 4.9pc over the quarter, revised down from a fall of 1.1pc. The ONS said this was due to survey data replacing a forecast.

The decline is the biggest quarterly fall in construction output since the fourth quarter on 1980.

Output of the production industries fell 4.5pc compared with a fall of 1.8pc in the previous quarter, driven by the marked decline in manufacturing output.

Separate figures showed Britain's current account deficit narrowed to £7.641bn in the fourth quarter of 2008 from an upwardly revised deficit of £8.162bn in the third quarter.

Sterling fell against the euro on Friday as it continued to suffer the fallout from Thursday's weak retail sales figures. High street sales plunged by 1.9pc during February, taking annual growth down to just 0.4 percent, its weakest since 1995

Following that theme, John Lewis - the department store group whose sales are often seen as a barometer of British retail spending - reported on Friday sales dropped by 12.6pc in the week to March 21.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Brown's reckless UK spending plans in trouble

The UK gilt auction by the debt management office failed to sell the small total £1.75bn on offer.

This is the first time such an auction has failed since 2002 and identifies probable concern over the health of public finances.

The failure in the auction will concern the labour government and follows a warning from Mervyn King on additional fiscal stimulus for the UK economy.

Future such auctions will be watched closely to gauge if yesterday’s failure was a one off or more failures will follow.

US stocks rose yesterday and the US economy was helped with a glimmer of hope from new home sales and durable goods coming in better than expected.

The dollar fell sharply for a brief spell yesterday as treasury secretary Tim Geithners comments were misconstrued by the market.

The basis of the comments was the suggestion of the US exploring Chinese proposals to incorporate a global reserve currency and so reduce reliance on the USD as a reserve currency.

Naturally the dollar was sold on this suggestion before clarification had filtered through to the media though this really shows how fragile and reactive the markets are in the present economic climate.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Wise Money asks- is this a good time to invest?

Wise Money notes that the stock market has jumped by about 500 points in the past couple of weeks, but investors thinking of putting their Isa money into shares want to know one thing: is this the start of a sustained recovery or a dead cat bounce?

Stock markets have shown signs of life in the past few weeks. Since London's benchmark FTSE100 touched a six-year low earlier this month, falling below 3,500 at one stage, it has rallied strongly, closing at 3,912 on Tuesday.

America's Dow Jones index has also put in a good performance, posting one of its largest ever one-day rises following the announcement of a bail-out for banks' toxic assets.

But British investors wondering whether to use this year's Isa allowance before the deadline of April 5 have reason to be cautious: the markets have staged several apparent recoveries during the economic crisis, only to fall back again.

MARK HARRIS, FUND OF FUNDS MANAGER AT NEW STAR

"I think the lows in March may prove to be significant, but that a 'test' may occur in April. If we can make a higher low for equities in April, it will be positive for further gains. But I should reiterate that I still believe that we are in a very challenging environment, and that it will be a couple of years before we can say that this bear market is truly over.

"So, put simply, we will see the rally which is just unfolding, then a correction of about 15pc, and then a further rally to take the market up in total by about 40pc from the lows."

JUSTIN URQUHART STEWART OF SEVEN INVESTMENT MANAGEMENT

"Shares on a five-year view may be OK, although prices could be highly erratic.

"I think it's too risky putting all my money into one asset class so I've diversified my investments into a mix of commodities, property, international shares and fixed interest securities such as bonds.

"You can do this yourself in a self-select Isa but it could be expensive and time consuming. An easier way is to buy a multi-asset fund, which you can hold within an Isa.

MARK DAMPIER, HEAD OF RESEARCH, HARGREAVES LANSDOWN

"Come what may, do buy an Isa – use your whole allowance (£7,200, of which £3,600 can be cash).

"Unless you trust politicians – and I don't – they are going to try to get more money out of you by raising taxes. So shelter as much as possible from tax while you can.

"Some people think the Isa allowance is so small that it's not worth bothering. But the yearly sums accumulate: a couple who had used their full allowances for every year that Isas and their predecessors, Peps and Tessas, have existed could have built up £190,000 by now – and that's discounting investment growth.

"I suspect this rally is more of a dead cat bounce; it comes from a very low position. There seems to be a base at about 3,500. Let's be a bit careful but with the market about 50pc below its peak it has to be an interesting time to think about investing.

"With inflation of over 3pc on the CPI you would normally have interest rates at 5pc, not 0.5pc. So given the risk of inflation taking off I'd consider gold, via a fund such as BlackRock Gold & General.

"This rally is still more hope than anything else, the kind that has a habit of disappointing. I wouldn't push a load of money in; I'd wait for bad days and drip-feed it in then. The markets are not about to race away but one of these days they will, so don't wait for ever.

"Eventually, there will be the mother of all rallies."

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Equities surge higher on US priniting presses

Markets are on a positive feel following yesterday's outline by Tim Geithner on the Public Private Investment Program in the US.

The plan involves the government buying up toxic assets held by banks which will allow the banks to free up their balance sheets. At the moment the debt sits with the banks and they cannot sell it on or value it, therefore the scheme aims to remove this and hopefully by doing this remove the chains that are preventing lending.

President Obama noted that the plan was a vital step but also reaffirmed that there was a "long way to go". Wall Street experienced a significant rally; the Dow Jones gained nearly 500 points in yesterdays session.

The low yielding currencies such as the USD and the YEN weakened on the news as investors sought higher yielding assets; the AUD and NZD continued to rally.

Interestingly EUR/USD has failed so far in its bid to extend towards 1.40 and the USD is at the moment gaining back towards 1.35 after failing to break 1.3730.

Sterling has moved higher against the dollar buoyed by the increase in the equity markets and GBP/EUR has also gained back to the 1.08 level.

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The backlash over AIG bonuses risks inflicting permanent damage on Wall Street

The pitchfork wielding anti bonus mob stirred up by American International Group is making for lousy tax policy.

Outraged US legislators are pushing through punitive taxes on bonuses not just at AIG but at all recipients of government funds. The hot-headed and unfairly retroactive changes could hurt investor confidence, undermine President Barack Obama’s credibility and damage the still valuable US finance sector.

AIG has been especially irresponsible, both with its risk-taking during the credit boom and with its handling of its affairs since.

Agreeing to extra bonuses and then paying them to employees of its financial products unit after receiving $170bn-plus in government money – and failing to sufficiently forewarn Congress and others to boot – has rightly riled Americans and their elected representatives.

Plans to tax bonuses at financial institutions that have been bailed out by the US government are the knee-jerk result. The scheme passed on Thursday in the House would result in taxes of 90pc on bonuses at institutions that have received funds from the government; in the Senate, which now has to consider the measures, thinking seems to be 35pc levied on the employer, and an extra 35% on the employee.

The bonus tax idea is bad for a range of reasons that senators should consider calmly, even if the House didn't do so. One is that it changes the rules – again – for recipients of government assistance.

Government initiatives to kick-start clogged financial markets depend on investors and institutions participating. If they think that the rules of the game are going to change continually, they’ll be reluctant.

The tax plans are also retroactive to the beginning of this year. Bankers awarded bonuses for 2008 – and some payouts were both relatively modest and legitimately earned – received them earlier this year, net of prevailing taxes.

They may in good faith have spent the cash, invested it or even given it away. Changing the rules now, and demanding a giant additional tax cheque, really isn’t fair.

Even more importantly, there’s the longer-term impact on the US financial industry. Wall Street’s finest, together with AIG – admittedly a different beast – are now in the doghouse together.

But the finance business is in fact one of America’s global strengths. The planned taxes are just the kind of thing that will give foreign firms and non-US bankers an edge.

In fact, US institutions may be motivated to pay back funds received under the Treasury's Troubled Asset Relief Programme so as to escape the new taxes.

That sounds like a silver lining - except that administration officials don't want that yet, for fear that firms will lose the capital cushion against further losses that Tarp was designed to provide.

That's just one example of the crossed wires inherent in the latest tax plans. And with so many bigger issues at hand, it's surely the kind of risk to credibility that Congress should make sure it avoids.

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G20 summit: Gordon Brown's G20 dream fades amid European hostility

Gordon Brown’s hopes of leading the world out of recession at next month’s pivotal summit in London were undermined yesterday when European leaders flatly rejected calls for a further massive stimulus package.

The lying Prime Minister has been forced to lower expectations for the G20 summit, where leaders of the richest 20 countries will gather.

Mr Brown has stopped comparing his event on April 2 to the Bretton Woods meeting in 1944 which set up the postwar world financial system. He recognises that there is no appetite to create new global institutions in the face of reservations in the European Union and the US.

The London meeting risks being overshadowed by a dispute between Europe and the US over public spending.

A series of leaders at an EU summit led by Angela Merkel, the Germany Chancellor, refused yesterday to go along with American calls for greater borrowing and spending by Europe.

Amid scaled-down ambitions for the G20 Mr Brown is backing a doubling of resources for the International Monetary Fund (IMF), the lender of last resort to bankrupt governments that Bretton Woods set up.

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Fed shock the markets with a bumper $1.15 trillion stimulus plan

The Pound and the euro rallied significantly last night against the USD as the Federal Reserve shocked the market with a $1.15 trillion boost for the US economy.

This has caused the US dollar to be sold off and we have broken through 1.40 again as the equity markets rally. $300 billion will be made available for longer term treasury securities and $850 billion for the ailing Fannie Mae and Freddie Mac.

The FX markets witnessed big swings with EUR/USD rallying to 1.35 and USD/YEN moving back down to 95.

The market is now looking for safe haven currencies outside the US dollar as currency risk is dissipated. Sterling gained against the USD but remained subdued in other areas and weakened against the EUR with a break of 1.05 now in reach.

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UK unemployment jumps at fastest pace on record

UK unemployment last month jumped at the fastest pace since records began, driving the number of Britons without work to above 2 million for the first time since the Labour Government came to power in 1997.

Figures from the Office of National Statistics released today show 138,400 people joined the dole last month, pushing the number of unemployed to 2.03 million.

In a blizzard of terrible data, the number of people who began claiming jobless benefits in January was revised higher to 93,500 from 73,800. City economists had expected a jump of 84,800 for February and the month's increase is the fastest since records began in 1971, and leaves the unemployment rate at 6.5pc.

"Horrendous," George Buckley, an economist at Deutsche Bank, said of the numbers. "This is probably going to persist for a while as long as that kind of growth continues."

The news sent sterling tumbling more than a cent against the dollar to to below $1.39 and left it weaker against the euro, down more than a penny at 94p.

The UK is likely to lose more than a million more jobs over the next 12 months, according to a report from consultancy company Oxford Economics, with the north and the Midlands hit hard. Economists are worried that rising unemployment will sharpen the recession as those still in work cut their spending.

The Bank of England's David Blanchflower, the most prominent economist to deliver an early warning about the threat of recession, said last month that unemployment could top 3 million, or 10pc in 2010. He recommends the government spends billions of pounds on public works to create jobs.

Rising unemployment is being mirrored across the world's major economies, with an unemployment rate of 7.9pc in France, 7.2pc in Germany, 6.7pc in Italy and 7.6pc in the United States.

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Markets enjoy another day in the sun

Shares in London jumped for a third successive day, giving hope that the cloud of gloom over the financial system is now lifting.

The benchmark FTSE 100 index jumped almost 3pc, rising 110.31 points to 3,863.99, while shares on Wall Street were also higher in late trading.

Markets were boosted by a statement from Barclays about its plans to shore up its balance sheet, and comments from analysts that shares are fast-becoming excellent value.

The news will encourage the Bank of England, which carried out the second of its reverse auctions as part of its quantitative easing programme. It is printing £75bn of new cash over the next three months to buy government and corporate debt from investors.

The idea is to encourage them to shift more cash into other investments such as equities. However, for the second time, the main sellers of the £2bn worth of gilts were not pension funds or insurance groups but investment banks and hedge funds.

There are nevertheless plenty of analysts who warn that the recent market recovery is actually a "sucker's rally", and that equities will fall further over the coming months.

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G20 meeting brings no surprise

There was actually very little news at the G20 on the forex markets and recent volatility.

The euro has bounced higher against the dollar and breached 1.30 again- perhaps prompted by the news that the under pressure emerging markets in the euro zone will have more resources available to them by the IMF if necessary, causing a jump in the euro.

USD also weakened on the more bullish market sentiment; with equity markets bouncing with the pound gain back above 1.40.

The bounce in Sterling which has gained back above key technical levels on the USD and the EUR identifies a more positive feeling within the UK economy. The Rightmove Housing survey released overnight also came in slightly positive with a 0.9% month on month gain.

With the Swiss and possibly other economies looking to adopt Quantitative Easing it may be perceived that the UK is ahead of the game. Still early days and recent news that 10 jobseekers are applying for every vacancy signifies a mountain to climb before the UK economy recovers.

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Gordon Brown and Bernard Madoff are separated by a single detail – Bernie's pleaded guilty

Gordon Brown and Bernard Madoff are separated by a single detail – Bernie's pleaded guilty.

Wise Money believes that the Prime Minister's mismanagement, which has brought us a dysfunctional state as well as financial disaster, will prove far more costly than any Ponzi scheme.

What's the difference between Bernard Madoff and Gordon Brown? Answer: one has drained fortunes from gullible victims, plundering their income and savings to create an illusion of prosperity. The other is going to jail.

Mr Madoff has thrown in the towel. His Ponzi scheme, whereby he needed to suck in ever greater quantities of other people's money in order to maintain a semblance of competence, collapsed under the weight of undeliverable expectations. Nobody knows for sure how much has gone missing, but Wall Street scribes are calling it a $65 billion fraud.

Not bad for peddling fresh air. It is, however, a nickel-and-dime swindle when set alongside the 12-year con trick perpetrated by Mr Brown on British taxpayers. That, too, has been a form of Ponzi, but with many more zeroes and little chance of the mastermind ending his days in what Americans call Crowbar Hotel.

The Prime Minister is nothing if not a man of vaulting ambition, with a desire for power which, like Macbeth's, "o'er leaps itself". While Big Bucks Bernie was snaffling billions, Mr Brown had his sights trained on trillions.

Five trillion, to be precise – that's £5,000,000,000,000 – which is how much Labour has taxed and spent since it came to power.

In 1998-99 its Budget was £333 billion. By 2008-09, the Government's annual expenditure had grown to £618 billion. Every year, the sums required to shore up the house of cards became bigger and bigger. But while the good times rolled, too few cared to notice what was really going on.

We await with trepidation this year's stab in the dark. On the basis that bad numbers take longer to add up than good ones, it is ominous that the Chancellor has put back his annual showpiece to April 22, the latest it has been for many years. One fears that fiscal discipline has been thrown over the fence, replaced by a confection of guesstimates, wishful thinking and spin.

Though the scale of their operations was very different, the sales techniques of Mr Madoff and Mr Brown were remarkably similar. Mr Madoff persuaded clients that he owned the secret of everlasting growth, a way of defying financial gravity. His unique selling points were, yes, stability and prudence.

Over the years, Mr Madoff stretched the credulity of his constituency well beyond what a rational man might have thought possible. Those who tipped cash into his coffers seemed anxious, in some cases perversely determined, not to ask difficult questions. The trompe l'oeil was too delicious to be questioned. For a while, fantasy economics passed for reality in New York and London.

When the elastic finally snapped, so did Mr Madoff's resolve. Rather than conjure yet more elaborate excuses to cover the hole where his clients' investments were supposed to be, the old rogue confessed. He could no longer bear the strain of living a lie. Coming clean, it seems, was a relief.

It's at this point that comparisons to Mr Brown come to an end. For not only is there no prospect of the Prime Minister pleading guilty, he refuses to acknowledge any aspect of his catastrophic mismanagement.

It may seem impossible to believe, but Mr Brown, far from recognising that he has ruined Britain, still has self deluded plans to save the world.

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What a difference a day makes

The equity markets surged higher after reports that Citigroup’s chief executive said that the US bank was profitable in the first two months of the year.

This helped the US dollar weaken across the board as risk appetite came back into play- a real turnaround for the heavily sold markets on Monday: also a real turnaround for Citibank who were rumoured recently to require more help from the government.

In the markets the dollar weakened against a basket of currencies but maintained strength against the pound and the euro.

The markets at the moment are mixed on the impact of printing money and currently it is being conceived as sterling negative due to the uncertainty and the de-stabilising short term effects it could have.

However on the flip side many economies may need to follow suit as policy easing will not be sufficient to increase money supply, therefore the UK may be ahead of the game- time will tell!

As the introduction of QE is new then undoubtedly the chatter and debate has spiralled with economists…in the words of George Bernard Shaw "If all the economists were laid end to end, they’d never reach a conclusion. " so let us hope that actions will be more effective than words on creating inflation.

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RIP Prudence, Zimbabwe here we come

The Bank of England opens a new front in its effort to ward off deflation today as it prepares to buy government bonds with newly printed money.

The central bank will purchase as much as £2bn of gilts, its first deployment in a three month plan that may see it waste £75bn. The final results of the operation will be released after 2:45pm. today in London.

The move marks a new departure for British monetary policy after officials cut the interest rate to a record low of 0.5pc on March 5, requiring them to seek new tools to stop the economy’s downward spiral.

While Governor Mervyn King hopes that pumping new money into the financial system will work, he’s relying on banks battered by the crisis to pass it onto lenders.

The Bank of England says it will give details of the auction this morning in London, without being more specific. The bank unveiled the plan last week after delivering a final cut in the key interest rate to a record low of 0.5pc.

Policy makers such as Andrew Sentance are concerned a “prolonged and deep recession” will stoke deflation and the National Institute of Economic and Social Research said today that the slump deepened in the quarter through February.

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Manic Monday on the currency converter forex markets

Yesterday we saw dramatic swings in the foreign exchange markets with the Pound being the protagonist.

GBP/USD retreated from Fridays 1.43 down to a low of 1.3750 yesterday; the pound also lost 4% against the Swiss francs from last week's levels and 2.5% against the euro.

The reason for the sell off was related to the labour government increasing its stake in Lloyds banking group from 43% to 77% and also to rumours that Barclays may be next in line for the communist takeover. Investors fear the nationalisation of banks and the fact that further capital is required, may lead to uncertainty in the rest of the banking sector.

Looking at this mornings trading we have witnessed a slight recovery for the pound against the dollar even against the back drop of further weak data in the housing and manufacturing sectors.

It now seems that the economic slowdown is reaching a truly global perspective as the IMF has confirmed that growth in Sub-Saharan Africa will slow to 3.25% in 2009 which is half of previous estimates.

Although investment exposure is very minimal it is the slowdown in demand for products and in particular commodities which is the biggest contributing factor.

Closer to home a similar pattern can be seen in Germany as exports slumped by a fifth in January, here the problem again is the slowdown in demand coupled with the recent strength of the euro.


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Gordon Brown- the new Robert Mugabe

Interest rates are now as close as they can get to zero without causing malfunctions in the financial system. In this new world, with the Bank of England shorn of its main tool for influencing the economy, the policymakers in Threadneedle Street have to turn to unconventional tools.

How does it work? The bank prints money, piles it inside a helicopter, takes to the skies and scatters the cash across the nation. Suddenly, every family is richer – provided they get to the cash in time and have sharp enough elbows.

This technically amounts to a tax rebate for everyone funded by money creation, and was christened a "helicopter drop" of money by economist Milton Friedman. In his eyes it was the most dramatic way for the central bank to get money out into the streets.

Pros: This instantly gets money into people's hands and, with any luck, gets them spending it in the high street. Those who don't spend can use it to pay off debt, which isn't such a bad thing either.

Cons It is so radical a policy it might scare away international investors from the UK. It displays a disregard for controlling inflation that could also send sterling plunging.

It will summon up even more vivid comparisons with Zimbabwe and Weimar Germany.

Does it work? It has never been properly tried before. The Japanese and Koreans have experimented with issuing vouchers to their citizens in the hope of encouraging them to spend but these were – importantly – not funded with created money. Fed Chairman Ben Bernanke is convinced, however, that in desperandum it would pump up a deflated economy.

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Bank prints £75bn and cuts interest rates in half

The Bank of England announced yesterday that it would begin “printing money” on a massive scale in an unprecedented effort to kickstart growth.

The Bank said that it would pump £75 billion into the economy as it halved interest rates to 0.5 per cent in a last-ditch effort to combat the slump. It added that there was no limit to how far it could go down this untried route of quantitative easing.

Mervyn King, the Governor, said that it was very unlikely that interest rates could go any lower. With rates close to zero, the bank has been forced to resort to a drastic new strategy to try to breathe life into the economy.

After Alistair Darling gave permission for up to £150 billion of new money to be created – equivalent to 10 per cent of the entire economy – the Monetary Policy Committee swiftly approved detailed plans to inject an immediate £75 billion to boost the amount of cash and credit flowing in the economy. The figure is much bigger than expected by most of the City.

The Bank said that it would pump in the money over the next three months by buying up huge quantities of bonds – government and business IOUs – from high street banks.

Despite Mr King’s assurances, City experts warned that the plan was fraught with uncertainties and risks. Critics point to the experience of Japan, where quantitative easing was attempted early in this decade with scant success.

George Osborne, the Shadow Chancellor, described the move as “a leap in the dark”. Vince Cable, the Liberal Democrat Treasury spokesman, said that the new strategy was now “the only clear option”, but cautioned that the Bank would have to be on its guard against the danger that printing money sparked high inflation.

The cut in interest rates to a three-century low will have a devastating impact on savers, particularly pensioners on fixed incomes who depend on the return from their investments.

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House prices fall a further 2.3pc in February

The sharp fall wiped out any optimism created by the surprise 2pc rise reported for January following a sustained period of falls.

Average house prices in February slid to £160,327, down from £194,953 in the same month a year ago. This takes average prices back to levels last seen in August 2004 and 20pc lower than the peak in late 2007.

One of the biggest problems for the housing market has been the inability among potential buyers to secure mortgages, with banks remaining risk averse and unwilling to lend. The number of first time buyers is now at the lowest level in 35 years.

While the latest mortgage approvals data suggest that activity may have bottomed out, and the Royal Institution of Chartered Surveyors has reported an increase in people making enquiries about buying a house, economists said house prices had further to fall.

"We are sceptical that sales will pick up substantially any time soon and put a floor under prices. Mortgage activity is still extremely low compared to long term norms, while many people are likely to be looking at houses pretty casually and will probably be very cautious about committing to buying a house in the current economic environment."

In the early 1990s, it took slightly more than 8.5 years for house prices to regain their late 1989 peak. With an even sharper slide this time, and probably a persistent problem of credit availability, it may take even longer to regain the recent peak this time.

Citigroup estimates that about 1.2m homeowners are now in negative equity, where the mortgage is more than the value of the house.

The Bank of England is expected to cut interest rates by half a percentage point to 0.5pc when it announces its monthly decision at midday, which will help some homeowners but further erode savings accounts.

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Wise Money says it's not panic but reason that is gripping stock market investors

Jack Handey, the American humorist, might get what's going on. "If you ever catch on fire," he once said, "try to avoid seeing yourself in the mirror, because I bet that's what really throws you into a panic."

The point at which fear turns to panic is notoriously difficult to judge. Which is why the P-word is being used rather too glibly to describe the current mayhem in the equity markets. Investors are actually behaving quite rationally.

Companies confident of their future earnings pay a dividend. But look around you and what do you see? Some of the biggest companies in the world, including HSBC and General Electric, being forced to cut their pay-outs.

Worse, businesses that investors once thought were well capitalised – HSBC (again) and Land Securities, say – are passing the hat round for more cash. Their rights issues dilute existing shareholders.

Look out a year and is there much cause for optimism? More business failures, rising unemployment and asset writedowns do not look a recipe for soaring share prices.

Not only that. Demographics don't help. In the 1980s and 1990s, baby boomers bought up financial assets. Now they are retiring, they may sell them.

Equally, there is a growing recognition that corporate earnings are now much more volatile than they have been over the past two decades – and hence less valuable.

Investors know that markets always overshoot on the upside and downside. And that someone will make a fortune out of this crisis. But catching fire is no fun either.

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Equities tumble as AIG losses shock the markets

AIG yesterday announced the biggest corporate quarterly loss in history as 4th quarter 2008 figures showed a $61.7bn loss.

The troubled insurance company is integral to insuring households and financial risk globally and would pose a systemic risk to the global economy if allowed to fall. AIG has already received support of $150bn and will now require further funding to sustain it.

The markets reacted swiftly to the news with US stocks falling to their lowest level in 12 years and the FTSE marking a slump of 5%. The bleak outlook yesterday was not helped by HSBC showing pre tax profits for 2008 down by 62% on the previous year and confirmation that it is seeking to raise 12.5bn from shareholders to help the firm through the uncertain economic environment.

The news released yesterday simply compounded the fact that the economic downturn is deepening and looking likely to continue.

The knock on effect in the markets was a huge sell off in equities and a rush to the safe haven US dollar. Sterling was sold heavily against the majors- rapidly falling towards 1.40 against the dollar and retracing to 1.11 against the euro.

Thursday will confirm the decision on interest rates for the Bank Of England and the European Central Bank; it is expected that both central banks will cut rates by up to 50 basis points.

Interestingly the Bank of Australia kept rates on hold at 3.25% last night, citing confidence in recent policy easing and stimulus packages as being sufficient to maintain confidence in the economy. Could we see a similar stance from the BOE or ECB on Thursday?

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HSBC profits fall by 28%

News already out this morning confirmed that HSBC’s half-year profits fell by 28%.

The main leakage occurred in its North American arm which made a $2.8 bn loss. HSBC warned that the current financial markets are the toughest for several decades. The forex markets digested the news by selling the pound against both the dollar and the euro from earlier gains.

The problems in the global banking sector seems to be escalating and this is very apparent in eastern Europe as many currencies have fallen to their lowest levels for years over concerns in the banking sector. On Friday a €24.5bn package was unveiled from multilateral lenders: the World bank, The European Bank for reconstruction and Development and the European Investment Bank.

It is hoped that this united front and direct stimulus will help the beleaguered sector to recapitalize and start lending; the Polish Zloty, Czech Koruna and Hungarian Forint bounced higher on the news.

The main focus this week will be on the interest rate announcements from the UK and the ECB. It is expected that both central banks will cut rates by 50 basis points; this is no surprise for the UK, however it will indicate a realization that the ECB are looking to act more aggressively than previously and this could weaken the euro. In the UK it is expected that plans will be initiated to commence quantitative easing as another measure alongside policy easing.

In the forex markets this morning we are seeing weakness in the higher yielding currencies as the ZAR, NZD and AUD and CAD slump on the back of a slump in Asian equities.

This has caused USD strength as USD/ZAR hits 10.30 and USD/CAD reaches 1.28; however the pound is also testing better levels against the higher yielders with GBP/NZD hitting 2.90 and GBP/ZAR breaking above 14.50.

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Range trading continues for currencies

Euro zone data released this morning (CPI and EU unemployment) has carried the theme of the week and met the consensus expectations.

The fact that CPI has remained steady will slightly ease the pressure on the ECB to cut interest rates in their March meeting. In the forex markets the theme of the week for most currency pairs has been range bound trading.

EUR/USD looks the most likely to break its current range as it approaches 1.26, GBP/USD is also approaching support at 1.4150 and GBP/EUR is being buoyed by USD strength against EUR.

Over the last week we have continued to see the YEN unwinding particularly against the USD falling 9% from the low to high point in the week- a major shift in sentiment!

This is not surprising after a poor start to 2009 for the Japanese economy; figures demonstrated that exports fell 46% in January alone and their economy sank 3.3% in the last 3 months of 2008. This weak data was exasperated by the resignation of the Japanese finance minister Shoichi Nakagawa following his erratic performance at the recent G7 meeting.

The weakening of the Yen as discussed earlier this week underlines a shift in sentiment away from a currency previously conceived as a “safe haven”.

The trend of the “Dollar Index” which tracks the US currency against a basket of currencies demonstrated this movement away from Yen and back into the dollar. The index has already increased 8% in 2009 as investors are now looking at the US dollar as the favourable option for safety.

This is ironic given the awful data arising from the US economy.... yesterday we saw durable goods fall 5.2% in January and jobless claims soared to 667,000- very weak data which only helped to strengthen the dollar as risk aversion and a flight to safety stepped up a notch.

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Royal Bank of Scotland announces record corporate loss

Following yesterday's UK GDP data the Pound looked resolute and stable, trading towards the top of the range against the dollar and the euro.

This illusion was shattered by dovish comments from MPC member Blanchflower and the news that RBS announced the biggest loss in corporate history at £24.1 bn; this was attributed by Chairman Philip Hampton to “unprecedented turbulence” in the finance markets.

The Pound shed 4 cents against the dollar and 2 cents against the euro; the situation was not helped with continued weakness in the equity markets which encouraged the safe haven dollar to be bought.

The scale of the loss for RBS was expected by the markets and the fall in Sterling was mainly attributed to comments by MPC member Blanchflower, who stated that unemployment is in line to rise by 60,000 every month.

Bank of England governor Mervyn King is due to discuss the banking crisis before the select committee on Thursday; this could increase calls for quantitative easing to commence in order to increase money supply.

This strategy will be a gamble for the economy as it is considered an unconventional measure, therefore it will be interesting to see how this unfolds and whether this will increase money supply or simply cause the banks to hoard more funds. If introduced there will pressure on the banks to increase lending- this time more conservatively!

In terms of economic data, today we have seen Nationwide UK house prices slump 1.8% in February- a record drop. This equates to a year on year fall of 17.6% and raises the probability that house prices could face further declines throughout 2009.

The continuing fall in house prices obviously has a direct link to mortgage lending, although lending increased in December it was still £5.8bn below the previous year with mortgage approvals in December less than half of the previous year.

The ideal goal for the government will be to increase lending and liquidity with the relevant controls in place so we do not see a repeat of this downturn; a long term goal in all probability.


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US stocks bounce from the lows

Following dreadful US consumer confidence data earlier in the day the Dow posted a 2% rise, this after Bernanke testified to the Senate on the health of the US economy.

He again highlighted that the US economy still faces further contraction, however he intimated that the US government would not move to nationalize US banks as this would lose value already built into banks. On the back of this there was an expected jump in bank stocks and this was the main driver for the gain in the Dow.

President Obama addressed congress for the first time yesterday and again stressed the severity of the economic crisis; he vowed to put a stop to wasteful spending and vowed that banks and bankers taking public funds would be held accountable.

He also reaffirmed his plan to cut the spiraling deficit which is becoming a huge problem for the US economy and will weigh on the dollar if not significantly reduced. Overall his address offered hope and determination for recovery as he vowed “we will build, we will recover”, lets hope so!

Yesterday in Europe we saw the German Ifo survey come more or less in line with expectations, today saw GDP come in exactly as expected at -2.1%. In the UK 4th quarter GDP was actually a touch better than expected showing a contraction of 1.5%, however taken in context this brings the year on year to -1.9% which is an 18 year low and reinforces the sharpness of the slowdown.

Following yesterdays theme on the Yen we have seen further weakness for the Japanese currency. USD/YEN has now reached 97 and GBP/YEN is back over 140 as the retreat from the Yen as a safe haven continues.

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US economic fears hit asia markets

Asian stocks fell heavily on Tuesday following last night's sharp decline in American shares.

Investors responded to fears that the world's largest economy is sinking further into recession and speculation that the US Government may be forced to buy stakes in ailing banks, despite assurances from Washington that lenders would not be nationalised.

Japan's Nikkei Index fell by 1.5 per cent to a four-month low, narrowly avoiding a slide to below 7,000 for the first time in 26 years, closing at 7,268.56. In Hong Kong, the Hang Seng lost 461.46 points, or 3.5 per cent, to end the day at 12,713.64. Last night, the Dow Jones industrial average fell to an 11-year low, losing 250.89 points to 7,114.78.

Japanese shares remained in the red for the day despite hints from Kaoru Yosano, the newly appointed Finance Minister, that the Government may be working on more measures to support the domestic share market.

"The side-effects of falling stock prices are worse than expected,” said Mr Yosano. “We are witnessing many negative wealth effects with impaired assets held by banks and insurance firms.”

Japan's Government is understood to be mulling over plans to buy falling stocks with money from the public purse in an effort to keep prices buoyant.
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Japan’s biggest securities house, Nomura, announced that it planned to raise about $3.1 billion via equity issuance. The capital-boosting scheme – itself seen as a sign of deepening trouble in Japan’s financial sector – is expected to cause massive dilution for existing shareholders, a risk that sent Nomura’s shares down 8.4 per cent.

Concern is growing that the Japanese banks, despite their stable capital position relative to peers in the US, will rein-in their spending even more fiercely, triggering bankruptcies throughout the small and medium-sized industrial heartlands of Japan.

“The view out of the porthole has become rather watery,” said one Mitsubishi Tokyo UFJ broker describing the four-session run of selling in Japan.

The broader investment scene in Japan was no more cheerful. There have been ten bankruptcies among Tokyo-listed companies so far this year and the cost of insuring Japanese corporate debt against default has now near a record high.

On currency markets, the yen fell to a one-month low amid warnings by analysts that the recent strength of the Japanese currency was wildly out of kilter with the country’s economic strength and that the speculative use of the yen as a “safe haven” would now start to decline.

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US Dollar under pressure

Last week although the currency markets were choppy, we did not see a significant break out of the current ranges for the main protagonists- GBP/USD, EUR/USD and GBP/EUR.

What we did see was more negativity in the equity markets as the Dow fell to the 2002 lows below 7300 amid fears that the US government will raise their stake in Citigroup and Bank of America- a step closer to nationalization which has raised concern for investors.

On the back of this the USD is showing the strain and we have seen a move higher on GBP/USD and EUR/USD reversing the dollar strength we saw last week.

Looking to the week ahead the main data to look out for will focus on releases from Europe and the US. Tomorrow we have the German IFO survey and Wednesday we see GDP data from Germany- the IFO survey will give an early indicator of current business expectations and sentiment and Wednesdays GDP will give a statistical measure of German economic activity and health.

The Yen over the last few months has been a dominant force in the fx markets. With risk aversion coming to the fore the yen has strengthened dramatically with a 43% gain on the pound and 14% on the dollar.

However over the last week there has been a shift in sentiment on the Yen with a growing feeling that going forward the Yen may not be the best option as a safe haven currency- with GDP contracting sharply and the resignation of their finance minister Shoichi Nakagawa.

It will be very interesting to see how this scenario plays out as this will re-distribute the flow of funds to other currencies. Other safe haven favourites being the USD and the Swiss Franc, the effects of any redistribution could have a major impact on the currency markets…

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Euro halts losing streak against the US Dollar

Yesterday the euro managed to halt its losing streak against the US dollar as the German finance minister stated that Germany would act if other countries in the euro zone required assistance, this helped to stall the euro decline and allay some of the fears of a potential banking crisis in Eastern Europe.

Data just released from Germany shows that the service sector has declined at a rapid pace and manufacturing activity also dipped slightly, this data emphasizes that there is little prospect to a near term end to the contraction.

EUR/USD yesterday made a recovery back to 1.2760 before retreating back to 1.26…the important factor is that it has not dropped below the 1.25 support level.

No real break in trend yesterday for the pound as it continued in a choppy range against the USD and the EUR. We have just seen retail sales data from the UK which is a surprisingly good number- showing a rise of 0.7% against the consensus of a fall of 0.1%.

The unexpected rise has been attributed to an increase in internet purchases and aggressive price cuts by retailers- in the immediate aftermath sterling moved higher against the USD and EUR.

In the US Barack Obama will host a summit next week to tackle the spiraling US deficit which is looking at levels of over a trillion dollars every year for the next decade. Obama is looking to revise a strategy to reduce the deficit over the next 10 years- if a plan is not put into place soon then this ballooning deficit should start to weigh on the USD especially if the equity markets start to recover.

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UK nationalised banks to add £1.5 trillion to public debt

Royal Bank of Scotland and Lloyds TSB, the two banks bailed out by the UK's communist Government, are to add between £1 trilion and £1.5 trillion to the public debt, the equivalent of between 70 and 100 per cent of GDP, the Office for National Statistics indicated this morning.

Britain’s public sector net debt is already a record high, hitting 47.8 per cent of GDP in January, official figures show. This is the highest level of debt recorded since the ONS started recording data in 1993.

The ONS said that it had decided to add the banks to the labour Government's books because "the Government has the ability to control the respective banks’ general corporate policy through the conditions associated with the agreements signed relating to recapitalisation."

Howard Archer, of IHS Global Insight, the economic consultancy, said: "Given the rate at which the UK public finances are deteriorating and new measures are having to be introduced to try to support the financial sector and the economy, it is frankly anyone's guess as to how high the public deficits may go over the next couple of years."

The massive debt will cause problems for the labour Government, which has already seen Northern Rock's debts added to its accounts. Analysts said that it would probably have to revise up its borrowing forecasts in April's budget.

Andrew Goodwin, Senior Economic Adviser to the Ernst & Young ITEM Club, said: "We expect the Chancellor to be forced to make significant upward revisions to his borrowing projections when he presents the Budget."

The public sector showed a surplus on current budget of £8.4 billion in January 2009, compared with a surplus of £15.3 billion in January 2008.

Between April 2008 and January 2009, the public sector recorded a deficit of £42.5 billion. At the same stage of the 2007-08 financial year, a deficit of £7.0 billion had been recorded.

Mr Archer said: "The public finances for January are terrible, coming in even worse than feared. January always sees a surplus on the public finances at is a bumper month for tax receipts.

"Unfortunately though, bumper hardly describes the tax receipts for this January as they have been decimated by sharply contracting economic activity, declining profitability, rising unemployment, reduced bonus payments, December's VAT cut and substantially weakened housing market activity and prices.

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The euro is in the spotlight

The Pound held up well yesterday as the latest inflation data confirmed that CPI fell 0.7% in January bringing the annualized level to 3.0% which is down slightly from Decembers 3.1%.

The 3.0% level is still well above the Bank Of England’s 2% target for inflation and this data suggests that interest rates may not need to be cut in March as previously thought.

However inflation will remain a concern for the Bank Of England- Mervyn King has already signaled that inflation could fall sharply this year and todays BOE minutes will give us more insight to the sentiment of the MPC.

The euro was the big loser in the currency markets yesterday falling to 2 month lows against the dollar and also retreating against the pound…real concern is now prevalent on the health of eastern European banks.

With the threat of a downgrade in credit looming over eastern European subsidiaries of Swedish and Austrian banks coupled with the expectation of more banking losses in Europe forcing the euro lower.

The EUR/USD moved to a low of 1.2548 and 1.25 is now the key target before a break to 1.2312…GBP/EUR failed to hold above a move back to 1.13 yesterday, however this will again become the target as the spotlight remains on the euro and its woes.

Overnight the final approval was placed on the US stimulus package of $787bn which is desperately hoped will kick start the global economy. The urgency of Obama to introduce this stimulus was justified as General Motors and Chrysler have requested another $21.6bn on top of the $17.4bn already received.

This caused a sharp sell off in equities- in particular the Dow as risk aversion kicked in.

One to watch in the markets at the moment is USD/CAD which has broken a key resistance level of 1.26…with risk aversion and the falling value of Oil we could see this pair re-test the 1.30 level in the near term.

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The Euro finally breaks down through the 1.2700 support

This support level has held since early December against the US dollar.

The target going forward is now for a lower rate with the medium term outlook still towards 1.1500. This latest Euro weakness stemmed from renewed apprehension towards the economic outlook for Eastern Europe and a warning released by Moody's overnight that Western European Banks' rating would need to be downgraded as a result.

The largest exposures to Eastern Europe are carried by Banks from Austria and Sweden but significant loans are also carried by German, French, Belgian and Italian institutions, which combined, account for 84% of western European lending to the region.

This provoked a new wave of risk aversion trading this morning in Asia with weakness seen not only in the Euro but also the AUD, NZD and other regional currencies.

The Yen, which has been a safe haven since the demise of the carry trade mentality, didn't benefit either as their own domestic woes appear finally to be catching Japan up (ie the collapse in Japanese economic activity - down nearly 13% y/y, the move to a deficit on trade and rising political risk with the PM's approval rating falling below 10% and the untimely departure of the Finance Minister following his ‘Rome adventure').

The currency didn't fall however and whether it was on the back of suspected US$ bond redemptions or whether Market perception that we are going to have ultra-low global interest rates for some time to come (hence no renewal of carry trade) or a combination of both doesn't matter. The fact is that any weakening of the Yen might prove to be some time away.

In Europe, today's German ZEW survey will confirm the severity of the recession in the Eurozone. Think of a number and put a minus sign in front of it - you won't be far wrong.

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Recession worse than first feared, Bank of England's deputy Governor warns

The UK has an odds on chance of suffering an even deeper recession than first feared, the Bank of England's deputy Governor, Charles Bean, has warned.

The Bank last week predicted a near 4 per cent year-on-year fall in output as the credit crunch tightens its grip on the wider economy.

But Charles Bean told an audience in Birmingham there was "roughly a three in four" chance of growth even weaker than the Bank's already-gloomy central projections.

Lingering woes in the banking sector and nations shunning free trade in favour of protecting their own industries could hinder a recovery, according to Mr Bean.

He told the National Farmers Union: "It is possible that efforts to restore the banking system may take longer to bear fruit, and that the adoption of protectionist measures abroad as the downturn deepens may slow the recovery."

The deputy Governor admitted that a "failure of imagination" had been in part to blame for the wider economic carnage caused by a debt-driven boom in property and asset prices.

He said "no one really foresaw the virulence with which the crisis would unfold", but argued that keeping interest rates at a higher level between 2004 and 2007 "would just have implied markedly higher growth and higher unemployment at an earlier stage".

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Where now for the pound?

Following another rollercoaster week in the currency markets we have seen the Pound rally and then submit its gains.

Today and tomorrow we have the G7 meeting in Rome and the recent weakness in the pound is expected to be a confrontational topic.

It is expected that French and German ministers will confront the chancellor following the dramatic sell off in the pound over the last year- the currency has evolved from a strong safe haven currency to a shadow of its former self- losing over a quarter of its value.

Today we have seen GDP data from Germany showing a larger than expected contraction of 2.1% and following this we have seen EMU GDP contract by 1.5%- this is the deepest contraction on record and emphasizes today’s contraction in Germany with Spain, France & Italy also posting negative GDP.

This is worrying news from the Eurozone and there is little light at the end of the tunnel- GDP is expected to fall by 3% in 2009.

Looking at the market fluctuations we have understandably witnessed lots of volatility- this morning we have already seen early gains in the pound against the dollar and the euro.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.