Markets slide as Greece scares investors

Stock markets fell yesterday as fear of contagion from Greece’s debt disaster combined with depressing US economic data to send share prices down.
The FTSE 100 slid 1.2 per cent to close down by 64.70 points at 5,278.22 amid fears that Greece’s problems could derail the already-fragile economic recovery. The CAC 40 in Paris fell even further, down 2 per cent, while Germany’s DAX was off more than 1.5 per cent.
Standard & Poor's warned on Wednesday night that it may slash Greece’s credit rating to close to junk within a month, despite new austerity measures designed to cut the country’s budget deficit.
The European Commission’s decision yesterday to revise down growth forecasts for Britain alone did nothing to calm shareholders’ nerves. The commission said that UK gross domestic product (GDP) was likely to increase by 0.6 per cent this year, rather than 0.9 per cent. 

 

However, prospects for the rest of Europe were not much brighter. The forecasts showed that economic growth across the Continent would be uncertain and dwarfed by emerging Asian rivals this year.
America’s main stock markets lost well over 1 per cent in early trading, with the Dow Jones industrial average shedding almost 174 points before recovering to close down 0.51 per cent at 10,321.03.
The US Labor Department’s tally of new claims for unemployment benefits also depressed investor sentiment. It said that new dole claims rose by 22,000 to a seasonally adjusted 496,000 people in the week to February 20. Economists had expected claims to fall to 455,000.
In his second day of testimony to a congressional committee, Ben Bernanke, the chairman of the Federal Reserve, cautioned against “over-interpreting” the jobs data, which he said may have been skewed by a backlog of claims caused by recent winter storms.
Mr Bernanke also said that the Fed was investigating the role played by Goldman Sachs and other Wall Street companies in Greece’s debt dilemma. 

 

American banks entered into currency swaps with Greece almost ten years ago that allowed the country to postpone recognising its debt.
“Using these instruments in a way that potentially destabilises a company or a country is counterproductive,” the Fed chairman said. “We’ll certainly be evaluating what we learn from the activities of the holding companies that we supervise here.”

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US to maintain low loans interest rates

Not a surprise but the markets appreciated the confirmation from the FED which removes any potential near term surprises from the Fed. 

Equities picked up on the news but risk appetitie is far from returning. Europe came back to the fore and this morning the markets are in a tailspin of fear again as the threat of a sovereign downgrade looms over Greece. 

This opens up the possibilty of Grrek bonds being illegible with the ECB, making it more difficult to borrow.

The Yen is flying in the markets today and has pushed below 89.50 against the USD and pushed GBP down to 136.82 as we stand. The Yen is being favoured as a safe haven after recent strong economic data; the USD has also experienced gains again today with EUR/USD dropping as low as 1.3449 and GBP/USD to 1.5270 a new 9 month. 

Big day tomorrow for sterling in the revision of the Q4 2009 GDP- it is expected that it will be revised up to 0.2% from 0.1%- we need as expected or better to stave off further sterling selling. 

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US consumer confidence remains fragile

Yesterdays US consumer confidence data came in weaker than expected and highlights the delicate recovery phase for the US economy. 

This also backs up recent dovish comments from the Fed asserting that interest rates will need to remain low for a prolonged period and that liquidity withdrawal may not be a foregone conclusion. The data helped to spook the markets and strengthened the natural safe havens of the JPY and USD. 

The Yen was also lifted on good export data pushing GBP/JPY back below 140.00 and USD/JPY down to 90.00. 

At the moment for recovery we have an east and west divide with robust recovery coming from China, Malaysia, Honk Kong contrasting the jitters in Europe, the UK and the US. The tide has shifted.

The Greece debacle is still ongoing and Fitch downgraded the 4 largest banks to BBB with a negative outlook to boot. The situation was not helped by a German lawmaker of the ruling conservative party commenting that Germany must ensure that it does not pay for Greece as it could trigger the demand for more aid. 

In addition the Czech finance minister said that the Greek pledge to cut the deficit to 3% in 3 years is "nonsense" in his view. 

So some lively times ahead.

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US Dollar shines after positive minutes

Yesterday the markets digested the minutes of the February interest rate meetings for both the UK and the US. 

Firstly looking at the UK the vote was a unanimous 9-0 to keep interest rates on hold and also to hold QE at £200 billion. The feedback from the MPC was ambiguous in the sense that the decision was unanimous and yet the comments were that it was a "finely balanced" decision to keep QE on hold. 

The unanimous decision gave Sterling a boost which was then tempered by weaker than expected employment numbers. Going forward this does not change the sentiment for sterling which will struggle to appreciate until the outlook for the UK warrants a more hawkish approach from the MPC.

Over to the US and the FOMC upgraded their forecasts for the US economy reflecting a more bullish tone from the Fed. 

They also discussed trying to shrink their reserves over time although no time frame was announced to do this. The positive tone from the Fed with improved economic sentiment in the US coupled with loitering fear in the markets helped to push the USD higher.

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Aussie Dollar shines whilst US Dollar weakens further

More weakness for the US Dollar yesterday across the markets except against the Yen. 

This push on US Dollar weakness relented in later trading after the Fed beige book posted a slightly bullish report for the US economy. Today is a big day for the USD with the eagerly awaited retail sales data and corporate earnings reported by Intel…the USD will need good news from both to stage a recovery and prevent further selling pressure.

The big winner in the markets was again the Aussie. The catalyst was better than expected jobs data; the unemployment rate dropped to 5.5% from 5.8% from the month earlier as the number of people in work rose by 35,200 in December. 

Australia is the stand out performer of G20 nations and has rallied on stronger commodities and increased demand from China. It will be interesting to see if the RBA raise interest rates at their next meeting; if so we could see AUD/USD hit parity and GBP/USD mover into the 1.60’s.

Sterling has benefited on feedback from the National Institute of Economic and Social Research (NIESR) which yesterday estimated Q4 GDP at +0.3% and thus out of recession. 

However it was still the worst year for the UK economy since 1921. A good week so far for sterling which was initially buoyed by hawkish comments from MPC member Andrew Sentance. Surely we are due for some bad news now…or is it the start of a sustained rally?

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The US Dollar rally continues

The US Dollar index- which measures the strength of the USD against a basket of currencies hit a 3 month high as the Dollar extended its recent rally. 

However the motivation for the rally shifted- previously the US Dollar gained on the back of recent positive economic data in the form of retail sales and payroll numbers. 

Yesterday it was more a case of good old fashioned risk aversion creating a demand for the safe haven US Dollar. A more upbeat statement from the FED may also have helped as they slowly turn more hawkish, however it was a clear case of risk off that drove the US dollar higher yesterday. 

The problem is that a weaker Dollar will have contributed to better economic data and now the USD is gaining we could see future economic feedback stuttering.

Looking at current levels EUR/USD has now fell back to 1.4380 and hit a low of 1.4304 a level not seen since September. The euro is still struggling on structural weaknesses within certain nations in the 16 nation zone. 

GB Pound/US Dollar also fell into 1.60 territory before creeping back to 1.62- a fall in BRC retail sales was not good news for the UK economy and this number on release caught the market off guard with sterling dropping sharply.

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Fed keeps US interest rates on hold

Last night the Federal reserve kept their interest rates on hold.

Reports indicate we may not see a rate hike until late 2010 or even possibly 2011. The dollar has gained against most currencies on the back of this, and US Dollar/Japanese Yen tipped higher for the third consecutive day.

UK retail sales figures for November MoM came in this morning at -0.3% against an expected 0.5% rise, pushing sterling lower against a basket of currencies. 

Sterling has moved below 1.61 on the back of last nights Fed decision to keep interest rates on hold, boosted by the poor UK retail figures. Key support levels around 1.6083 should see the dollar move towards 1.59 regions.

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US unemployment rate hits 26 year high

America's unemployment rate hit a 26 year high of 9.7 per cent after companies cut 216,000 jobs in August.

The Labor Department also revised job losses for June and July, increasing by 49,000 the number of jobs lost in those months.

The job cuts in August were not as severe as the 225,000 cuts expected by economists. In fact, it was the lowest number of monthly job cuts in a year. 

The Dow Jones industrial average rose 29.32 points to 9,373.93 while in London the FTSE 100 index added 64.91 points to 4,861.67.

But, the unemployment rate, which dipped to 9.4 per cent in July, ratcheted up because 73,000 workers who had previously given up looking for jobs started hunting for employment again, increasing the potential labour force.

US unemployment is expected to hit 10 per cent by the end of the year. The country has lost about 6.9 million jobs since the recession started in December 2007 and there are now 14.9 million unemployed Americans.

However, the August report confirmed the pace of cuts was easing from early this year, when nearly three quarters of a million jobs were lost in January.

The Federal Reserve warned on Wednesday that the job market was still "poor" and companies would remain cautious about putting on workers despite increasing signs of an economic recovery. 

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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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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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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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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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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."

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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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Taxpayers bailout failures

All eyes will be on the FOMC meeting today at 7.15pm this evening GMT.

With the rate already at 0-0.25% the focus will not be on whether they will or won't cut (no change is expected) but the wording of any statement releases. It is likely that the focus will shift to the quantitative easing measures that the Fed could use to stimulate the economy.

Particular reference is likely to be made to the three key tools Mr Bernanke outlined in his speech in London on 13 January: credit easing, lending for financial institutions and buying of longer term assets.

It is thought that the Federal Deposit Insurance Corp. (FDIC) may manage a so-called "bad bank" that the Obama administration is likely to set up in an effort to help ailing US banks. The aim is to buy up poor assets on banks' balance sheets. Plans are expected to be announced early next week. This will, no doubt, place pressure on the UK to come out with a similar package.

France's Consumer Confidence Indicator was released this morning coming out ahead of expectations at -41 (versus -45 expected). This small bounce from the low of -47 seen last July is not significant but a move in the right direction.

On the currency front we have seen GBP continue to rally over the week to current levels of 1.4315. This is a small step up considering the 32% drop we saw from mid last year when GBP was trading at $2 to last week's low of 1.35.

This short term sterling strength has seen GBPEUR remain above 1.07.

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Chinese New Year Holiday

Plus today's Australia Day Bank Holiday heralds a very thin Far Eastern market for the next 5 days.

In the UK, Alistair Darling is bemoaning the recent moves by the markets in response to the Bank rescue package established last week, saying that the City has missed crucial details and that the package will work. Toys and pram come to mind.

The out-going MPC arch-dove, Blanchflower was also in print over the weekend doing what he does best, talking UK interest rates lower. He was however, more bullish than most in his medium term assessment for the UK with a fairly upbeat prognosis as opposed to the outlook for the Eurozone.

Talking of the Eurozone, there were mixed messages from ECB members with the usually less than hawkish Mersch stating that he would be uncomfortable with the risks of cutting rates much further from the current 2% as this would risk the ECB losing policy control.

Weber meanwhile, who is normally one of the more hawkish of the ECB policy board, admitted that the downturn in the economy had been more prolonged and steep than had been envisaged. Even though no comment was made on interest rates directly, the fact that Weber's opinion might have softened, could be very important going into the next meeting.

This week we have the Federal Reserve meeting which one would not expect to produce anything that we have not heard/seen before. Other than that, market participants will await any positive signs from the bits of economic data coming through as well as waiting comments from participants at the upcoming Davos get together.

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Zero rate interest rates

The Federal Reserve, at their meeting yesterday evening, cut the Federal Funds target rate (the rate at which US Banks can borrow in the overnight) by a massive 75bp to a range of 0% to 0.25% and was additionally very aggressive in the statement that followed.

The decision was unanimous amongst the Board, and the Committee expanded by stating that they were committed to keeping the rate at "exceptionally low levels" for "some time." Quantitative easing itself was not mentioned but there was reference to less conventional methods for the continuation of current policy.

Given that the rate is now essentially zero, economists feel like this was as aggressive as the Fed could get without getting into dangerous territory. Wall Street surged and the Dollar collapsed.

This morning, stocks have retraced and the Dollar remains weak. The outlook for the Dollar has to remain a little rocky in the near-term, more-so against the Euro than Sterling with a distinct possibility of seeing 1.4700 before the Euro tops out.

Sterling is struggling to keep up with the Euro so far which isn't surprising given that this morning's release of the minutes from this month's MPC meeting showed a 9-0 vote in favour of the 1% cut and that the committee discussed the possibility of making an even larger cut.

The Fed's action has now instilled in the market the view that the MPC will be compelled to act aggressively and likely sooner rather than later. the ECB, however, are seen to be dragging their feet especially given Trichet's hawkish comments that there were €˜limits to rate cuts. Sterling again hits an all time low against the Euro this morning.

Today we watch and wait. We have a CBI survey released later this morning and the interest rate decision from the Norges Bank this afternoon. Otherwise we will look to Wall Street opening as the catalyst for the next move.

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Wise Money eyes interest rate cuts

Following the marginally weaker than expected data yesterday afternoon and a growing anticipation of a greater than 50bp cut in the Fed Funds target rate this evening.

We saw highs in cable and euro at a tad over 1.5350 and 1.3725 respectively before caution again took the upper hand. Today, consolidation at these slightly lower levels, ahead of today's FOMC meeting, looks the solid play with only US CPI and Housing Starts data this afternoon likely to cause any ripples.

We have already seen worse than expected French and German manufacturing and services PMI numbers plus the first fall on record for Qtr/Qtr Eurozone employent which really ought to quell any great desire to buy Euro from here.

The Stock and Commodity Markets, in contrast, should be reasonably lively. It is interesting to note that Goldmans have started to look more bullish on European paper and packaging companies - a sector that in normal circumstances has been a portent of future moves in the economy.

Traders are also looking to automotive stocks for movement after France becomes the first country to provide credit guarantees to the financing arms of its carmakers with a Euro 779 million payment split between Renault and Peugeot.

A sighter for the US and UK perhaps with the Germans to follow. The market remains concerned over the prospects of a failure to achieve a rapid solution to the US automakers' bailout package however.

The Bush administration is attempting to figure out how much aid they can provide at a minimum and how to fund it while trying to balance expectations for other industry bailouts and the timing of any assistance remains up in the air.

Press reports suggest anywhere from $10bn to $40bn could be extended to the automakers and the funds could possible come from the TARP. However, since most of the first tranche has been used, Congress would have to approve the release of the second tranche for any auto bailout.

Oil has firmed ahead of an almost guaranteed production cut by OPEC at this weekend's meeting. The call is for a 1 - 2 million barrel per day reduction with a perceived €˜acceptable price of oil at $70-75 per barrel to be targeted.

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Nationalisation of US car markers looks bleak for wise money

And looks like an absolute disaster for Stocks, Commodities as well as just for a change, Sterling.

The Senate in the US last night, rejected the $14 billion bail-out plan that would have seen a deferment of the cash crisis at GM and Chrysler much to the dismay of markets that were still operating at the time of the decision.

The Dollar spiked to 1.3400 against the Euro but eased back again and the stock futures indicated lower openings today. They weren't wrong. Global auto manufacturers shares have plunged on the opening of the European bourses with fears that Wall street is going to be a bloodbath.

European banking stocks are also on the slide following the trading update from HBOS (ahead of the EGM to approve the takeover by Lloyds). The Bank revised their impairment charges for the year to date by GBP 3.3 billion to give a total hit for the year of GBP 8 billion. All Banking stocks slid by just under 10%.

The main beneficiary from the turbulent Stock Markets is the US Treasury market where lower yields are being seen day by day. Investors are happy to swap yield for security at present.
Interest rates continue to ease.

Taiwan joined the Koreans and Swiss in cutting rates yesterday and with India's factory output falling for the 1st time in 13-years, expect the Reserve Bank to be cutting Rupee rates sometime very soon. Russia were also very high profile in the managed devaluation of the rouble. So with all this going on, and a global recession still very much deepening, why is it that Sterling looks so weak and the Euro and Yen so strong?

Given that the latter 2 currencies come from different ends of the interest rate spectrum then it can't be down to yield. Therefore, you have to work on the basis that every industrial country in the world is now looking to allow their currency to devalue in order to make their exports more attractive so that demand from abroad kick starts their own economies.

All well and good in normal times but it is very obvious that not all currencies can devalue at the same time (at least one has to be the recipient of the diversification and appreciate) and it is the Euro and Yen that are adopting this role for now.

The euro for now is very important because it implies that in order to emerge from their own recessionary periods, the economies in Euroland and Japan will need the added stimulus of weaker currencies.

Therefore Sterling's weakness does look temporary, if not overdone, BUT in the short term the market has 0.9000 in its sights. The saving grace might be the declining numbers of participants in the market as we get closer to the Xmas holidays.

In the meantime, Sterling has again made record lows against both the Euro and its Trade Weighted basket.

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Data goes from bad to worse

Where does Wise Money start? Well, following the recent positive trend in consumer confidence (which, as pointed out in previous posts, is seemingly just on the back of lower oil and petrol prices) the market was jolted back to the dreadful reality of the manufacturing and retail sectors with very weak data and further job losses.

Concern over the immediately outlook for UK plc was reignited following the release of the CIPS/Markit manufacturing survey yesterday morning. The number was expected to be bad but the reality was worse with the headline number reported at its lowest level since 1992 and indicating that industry's output and orders are falling at their fastest rate since January of that year. This in turn, triggering widespread job losses.

The exchange market took the news badly and proceeded to dump Sterling back through the previous hard won support levels of 1.5020 and 1.2000, with the moves lower accelerating through the day so that by the close, cable had fallen by its largest margin since that day in 1992 when Sterling left the ERM.

The PMI survey from the Eurozone showing that manufacturing in the region was at its weakest for a decade gave no respite and the release, later in the day, from the Institute of Supply Management in the US suggesting that the economy in the States is in its worst position since the recession was also ignored by the exchange market.

Stock Markets caved in and Sovereign Debt yields plunged as investors rushed out of vulnerable equities and headed for the relative of security of US Treasuries and Gilts.

Money Markets were comparatively less volatile ahead of the perceived rate cutting extravaganza this week. Estimates for the sizes of cut by the BoE and the ECB grew during the day however and increased further overnight following the decision by the Reserve Bank of Australia to cut their own rates by a further massive 100 basis points to 4.25%.

Calls this morning are for the MPC to cut by a full 1.50% and the ECB to go by at least 0.75%. It is going to make for a nervous couple of days for holders of Sterling or Sterling based investments.

The Fed Chairman, yesterday evening, also aired his views on the current condition of the US economy and his prognosis was not good. Not terminal but not good. He basically said that things would get worse from here before any sort of improvement by the end of 2009.

He as near as possible promised that US rates would be cut to an unprecedented low of under 1% at their meeting on the 16th Dec and also looked to appease concerns that the Fed were running out of ideas to help the ailing patient. As stated above, Wall Street took fright, the Dollar strengthened.

This sort of outlook caused consternation in the commodity markets as renewed demand was deemed a long way off. Gold plummeted back to the $760 level and oil also fell, below the technically important support $50 per barrel. The price of WTI this morning is a little below $48.

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More interest rate cuts to follow

The minutes from this month's Monetary Policy Committee meeting revealed that the MPC recognised the need for a cut in rates of at least 200 bp to ensure that their long-term inflationary goals would be met.

However, they decided that a cut of this magnitude might have serious adverse effects on the value of the currency and hence distort inflation measures in the short term. They also decided to keep at least some of their powder dry so that additional easing could be introduced at later dates in order to try and improve sentiment as/if the economy worsens.

On the back of this it looks odds on that we will see a further cut at the December meeting with the market looking for a 0.50% move lower in rates. Period rates ought to continue to ease on this assumption but so far, there has been little evidence of this happening to any great degree.

Yesterday, we also had the presumed gloomy CBI Manufacturing survey and the market was not disappointed. Despite a small up-tick in the orders index, the overall report was awful with the November index of expected orders falling to a 28-year low. More ammunition for the €˜further rate cuts brigade.

Today will bring the October data for UK Retail Sales. There is absolutely no doubt that the figures will be grim following press reports of dismal High Street conditions and pre-Xmas sales announcements from such stalwarts as Marks & Spencer, John Lewis and Debenhams.

It would not be a surprise if, even in the Xmas run in, we saw a complete standstill in consumer spending y-on-y although the expectations are for a small rise.

The Federal Reserve minutes from the last meeting were also out yesterday afternoon but followed a similar pattern to the UK version. The Board revealed a gloomy economic outlook with potential for further monetary easing. They lowered their estimates for GDP and increased their projected unemployment level, both for the end of 2009.

One thing that was mentioned in the minutes, and something that will crop up more and more in the future given the global economic situation plus the ultra low level of interest rates, is €˜quantitative easing. This entails a government introducing measures that not only flood the market with excess liquidity but also reduce long term interest rates.

Last used in Japan during their long period of deflation (not to any great effect for a long time I add) and likely to become more popular amongst Western Governments during a prolonged grind down in economic activity.

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FED delivers an interest rate cut to 1%

No surprises as the Fed cut interest rates by 50 basis points to 1%.

They were joined yesterday by the Chinese and Norwegian central banks who cut rates by 27 and 50 basis points to 6.66% and 4.75% respectively.

It looks as if the Bank of England and the European Central Bank will keep us waiting for their interest rate decisions until next week.

On the foreign exchanges both the yen and dollar weakened further as risk aversion continued to ease, stock markets posted strong gains and expectations for further interest rate cuts grew ever stronger.

UK mortgage approvals rose in September for the first time in more than a year, after hitting a record low in August. Mortgage lending last month was more than twice market forecasts but that followed a downward revision to August which showed the first net repayment since the series began in 1993.

The BoE said mortgage approvals rose to 33,000 last month from a record low of 32,000 in August, the first rise since June 2007.

While the figure was marginally higher than expected, approvals are running at a third of their level a year ago, suggesting continued downward pressure on house prices. Net mortgage lending rose by £2.167 billion in September, more than twice analysts' forecasts, but the BoE revised down its August figure to show a fall of £691 million.

Consumer credit rose by just £251 million in September, the weakest rise since February 1994 and supporting anecdotal and survey evidence that consumer spending is weakening.

The Nationwide Building Society released its latest house price survey this morning that showed house prices fell 1.4% in October compared to a revised drop of 1.5% in September.

The annual rate of decline was 14.6% the biggest annual fall since comparable records began in 1991. On the upside September's fall was smaller than the declines reported in each of the previous three months.

In the US yesterday a report showed that US Durable goods rose unexpectedly in September by 0.8%, led by surging demand for defense goods and transportation equipment.

The jump in orders for durable goods - items intended to last three years or more - followed a revised 5.5% drop in August. Dealers were expecting a 1.2% decline.

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A much better day for equity markets all round as bargain hunters take stock

The dollar and the yen both fell back as shares made strong gains across all exchanges as equity traders chased bargains and currency dealers decided to take profits.

The yen plummeted against the dollar following reports that the Bank of Japan is considering a 25 basis point cut in interest rates in order to underpin the economy. Also weighing heavily on the dollar were reports that consumer confidence and house prices in the US fell sharply.

The yen suffered its sharpest one day fall against the dollar since 1974.

The dollar gained 5.3% to trade at 97.75 with the euro improving 7.3% to 124.36 yen. Sterling gained also benefitted despite expectations of lower interest on the back of a relatively positive CBI report.

Prices of US single-family homes plunged a record 16.6% in August with U.S. consumer confidence recording a record low in October as a worsening financial crisis made Americans anxious about their jobs and pessimistic about the future.

The Conference Board said its index measuring consumer sentiment tumbled to 38.0 in October from an upwardly revised 61.4 in September. That was the lowest reading since the index began in 1967. The previous low was 43.2 in December 1974.

Sterling held up well against the weaker dollar and the euro as UK retail sales fell less than expected in October.

The Confederation of British Industry's distributive trades survey balance stayed unchanged at -27 in October. Analysts had predicted deterioration to -35. The balance had fallen to -46 in August, its lowest reading since the series began in 1983.

All eyes today will be on the US Federal Reserve as markets await the FOMC rate decision due to be announced at 18:15 GMT with most analysts forecasting a 50 basis point reduction.

The probability of a coordinated rate cut today involving the Fed, the Bank of England and the European Central Bank is looking less likely.

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Bernanke comments give the markets hope

Yesterday's fairly restrained market was kick-started into life in the afternoon by comments from the Federal Reserve Chief, seemingly directed at Congress, in which he intimated that the US economy required a new fiscal stimulus to get it back on track.

Both the Dollar and the Stock Market rallied with the Euro hitting a new 18-month low this morning. Cable also briefly fell below 1.7100 but early morning jitters have halted the Dollar's early progress.

Technically, there is strong potential for a further immediate strengthening of the US currency, especially if doubts persist as to the likelihood of a turn around in the UK and Eurozone economies.

LIBOR interest rates continued to correct rapidly in the Dollar's case, but in a more sedate manner in Euro and Sterling.

The freeing up of the Money Markets is vital to an economic pick up so expect further Central Bank measures to keep the momentum going. Expectations for huge liquidity adds plus continued official rate cuts should keep the momentum going but it is a return to confidence between Money Market operators that will determine whether period lending resumes.

Talking of economic stimulus, the UK, as expected, reported Government borrowing at a record level last month with September's figure surging to £8.1 billion, almost double the number from 12-months ago. Estimates for the total for the year are for an excess of a massive £60 billion, with rises in the deficit for the following 2-years.

With the assertion from Brown yesterday that the UK was looking to stave off a continued slide into recession by spending, plus the additional funding required to fund the Financial Market's bail-out plan, these borrowing figures look destined to deteriorate before any improvement for increased tax revenues are seen.

That's not to say that this is not the right way forward for the UK economy in the short term.

Bringing forward labour Government construction projects to stimulate and underpin the UK building and civil engineering sectors could certainly prove to be inspirational.

The problem is that despite having a fistful of factors that they are able to influence, the UK Government is unable to do anything about the one thing that is fundamental to the economy's recovery. That is increasing consumer demand from its current lows.

Confidence is at such a low that even if No. 10 were able to slash interest rates, it is going to be some time before the consumer returns to the High Street in any numbers. It looks as though it is going to be a long winter……

Elsewhere, Iceland becomes the first sovereign state since the UK in 1976 to go cap in hand to the lender of last resorts, the IMF.

For those of you old enough to remember the results in the UK following the IMF loan to the then labour government, the restrictions likely to be imposed upon Iceland will be draconian making redemption of the frozen deposits (no pun intended) a distant prospect.

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The road to recovery

The US Treasury announced yesterday that it will spend at least $250 bn on preferred equity from major financial institutions.

The plan is in some ways a turnaround for the government which initially seemed to be focusing on the $700 bn programme authorized by Congress on buying up illiquid assets that were clogging the banking system.

German's ZEW sentiment survey released yesterday reflected a deterioration in confidence in September, the height of the financial crisis.

The ZEW said that perspectives for economic development have significantly deteriorated due to the financial crisis but a separate analysis following the bank rescue package reveals a less pronounced decline in expectations.

In the UK CPI released yesterday posted a higher than expected 5.2% - the highest since 1997. Whist on the surface a high reading may be deemed to be problematic for the Bank of England the MPC's focus seems to be shifting to that of growth concerns as inflation is forecast to cool by mid-2009.

In the same breath, UK unemployment rose to the highest level in almost two years, slightly ahead of expectations as market participants forecast a significant deterioration in the labour market.

Risk appetite continues to play a significant role in the market, whether it be equities, cash, commodities or currency. Sentiment for sterling remains positive as the UK government continues to lead the way in dealing with the current challenges in the market.

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Equity markets support central banks

UK and European moves to restore confidence in financial markets were met with strong approval by markets yesterday as the FTSE, Dax and CAC40 all rebounded.

The US recorded is largest one day rally since the recovery following the 1929 crash while Asian shares continued the trend overnight with the Nikkei climbing a record 14.2%, and the Hang Seng up 4%.

The FTSE gained 8.3% on the back of the details that emerged of the UK government's plans to inject some £37bn that will result in a part nationalisation of some British banks.

The UK model was mirrored in the Eurozone with a number of nations announcing plans. Germany guaranteed €400bn of interbank lending and provided a €100bn fund to inject capital while France guaranteed up to €320bn of interbank lending with a further €40bn at its disposal to provide new capital. The Dax and CAC40 both ended the day over 11% higher.

The US has this morning announced that it will invest $125bn in nine major American banks as part of its $700bn plan, with Treasury Secretary Henry Paulson is due to speak later today to discuss the plans which also involve a further $125bn to recapitalise financial institutions across the US. The Dow rose 11.08% yesterday.

Three month GBP Libor set slightly lower at 6.27 and three month Dollar Libor fell 7 basis points to 4.75, in what may be signs that interbank lending markets are reacting positively to government intervention.

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Central banks unite to save the markets

Friday capped a week of losses on global equity markets with the FTSE shedding nearly 9% while the Dow Jones fell 128 points.

This morning news is emerging of the outcome of talks over the weekend between world leaders to restore health in financial markets.

In the UK it has been announced the government will inject up to £37bn into banks in a move that will leave the government with sizeable stakes in some banks. The action raises levels of tier 1 capital in the latest attempt to restore confidence.

It has emerged from the weekend's meeting of Eurozone leaders in Paris that interbank lending will be guaranteed until the end of 2009 with UK Prime Minister Gordon Brown stressing the importance of "co-ordinated intervention" to restore confidence.

Brother Brown has urged European neighbours to follow the UK model of intervention whereby the government will take stakes in banks. The G7 finance ministers also unveiled a five point plan to revive markets while Australia, New Zealand and UAE have guaranteed all bank deposits and Norway and Portugal announced plans to aid bank financing.

Markets have reacted positively to the news with Australian markets rising 5.6% and the Hang Seng up 3.2% overnight. The FTSE, German and French markets all opened in positive territory this morning though Japanese and American markets are closed for public holidays.

It is likely today that individual EU nations will announce their plans within the framework agreed over the weekend while in the UK Producer Price Index data will be released, with an expected 0.4% month on month fall and 8.8% reduction year on year.

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Labour nationalises UK banks

Gordon Brown took the momentous decision to invest about £50bn into the financial system to nationalise the majority of the UK banking system in the largest state theft in British history.

The details of the part nationalisation of UK banks are still unfolding but so far we know that the labour government will buy preference shares, the BoE will make at least £200bn available for banks to borrow under the special liquidity scheme and the government will provided a guarantee in the region of £250bn to help refinance debt.

As stated by Alistair Darling €˜these steps are the necessary building blocks to allow banks to return to their basic function of providing cash and investment for families and business.

In the US the fed announced that they will purchase US Commercial Paper in an attempt to support the financing needs of corporations. The Fed will lend against a special purpose vehicle and the issuer will pay an upfront fee based on the commercial paper initially sold to the vehicle.

This will be in place until the 30 April unless the Board of Governors agree on an extension. Following this announcement global stock's regained some poise, however this was short lived with the S&P 500 down 5.74%, Dow Jones down 5.11% and the FTSE 100 by 0.3%.

Bernanke comments during his press conference to the National Association for Business Economists highlighted that the outlook for economic growth had worsened and the downside risks to growth had increased, this leads to a greater probability that the Fed will cut rates at their next meeting on 28-29 Oct if not before.

Furthermore the markets are predicting an even greater chance that the central banks will group together to announce a coordinated global interest rate cut. It seems that the longer this decision takes the greater the lack of confidence in the markets becomes.

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Debate escalates on Fed bailout plan

Another day of falling crude oil prices and the morale boost investors experienced on reports of Warren Buffet's $5bn investment in Goldman Sachs saw the dollar gain ground against the euro and other major currencies yesterday.

First thing this morning the Pound regained its upward momentum against the dollar following comments from Bank of England member Andrew Sentance stating that the central bank must control its response to the financial crisis and remember its mandate of inflation control.

There has been a shift in thinking within the Bank of England to that of a more "€˜dovish stance". That said there is still a large proportion of people who believe the Bank of England will lower rates when they next meet on October 8th.

The ongoing debate between US Treasury Secretary Paulson, Fed Chairman Bernanke and Congress has seen scepticism from both Democrat and Republican politicians. Congressman from both sides wanted assurances that the Treasury Asset Relief Programme wouldn't result in a waste of public funds.

Paulson attempted to provide comfort by explaining “the program we have proposed is not a spending program. It is an asset purchase program, and the assets which are bought and held will ultimately be resold with the proceeds coming back to the government".

George Bush expressed his support through a broadcast to the nation on primetime television, urging them to back the plan in order to ease a “serious financial crisis".

Furthermore, John McCain emphasised that he was prepared to suspend his presidential campaign until a solution was agreed, pressuring Obama to do the same. The uncertainty surrounding which aspects of €œPaulson's Plan will be approved forced a flight to safety which saw interbank lending rates hit record highs yesterday.

Whilst economic releases continue to take a back seat in determining the direction of the markets, German IFO figures fell to a lower than expected 92.9 in September at€“ it's lowest rate since May 2005, pointing to the growing threat of recession in the Eurozone economy. US home sales also reported a fall to its slowest pace in 17 years.

Some key data out in the US today; New home sales, Unemployment claims and Core durable goods orders.

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Focus on Congress for vote on bailout

The focus remains on the uncertainty surrounding the U.S. bailout package and the details of how exactly the final version will look.

In their speech to the Senate Banking Committee, Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson told members of Congress that the U.S. economy and its financial markets face serious risks if the rescue plan for the crippling toxic assets isn't swiftly approved.

Bernanke urged Congress to pass the $700bn bailout plan to "stabilize the situation". He stressed that "global financial markets remain under extraordinary stress" and "if financial conditions fail to improve for a protracted period, the implications for the broader economy could be quite adverse."

Paulson reiterated that further delay in implementing the plan would “threaten American families' financial well-being, the viability of businesses both small and large and the very health of our economy".

Fundamentally, the US Treasury aims to purchase all the toxic assets that are currently clogging the financial system and sell those assets at a profit once markets have improved. The scheme could cost the US taxpayer as much as $1 trillion, increasing the country's national deficit to over $11 trillion.

Earlier gains on the U.S. stock market were reversed as the saga unravelled and oil prices dropped from Monday's peaks, to close last night at around $107 a barrel, boosting the dollar.

The Euro Zone escaped the limelight yesterday due to the focus on U.S. events. Attention in the Euro Zone was on PMI where the index now points to a 0.2% decline in quarterly gross domestic product.

The data provides little evidence that the outlook will improve significantly in the near term and it looks like the third quarter is going to be challenging.

In the UK, British mortgage approvals fell 64% on the year to a record low in August. This seems to suggest there is no imminent end in sight for the country's housing market woes.

The British Bankers Association blamed the drop on uncertainty regarding the government's policy on stamp duty along with the continued affordability pressures and tight lending conditions.

With these poor fundamentals for the housing market it remains uncertain as to whether the recently announced labour government measures to support the housing market will have any significant impact in stabilising activity or prices.

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Wise Money's concerns rise over Fed bailout

Friday's dollar rally was replaced by yesterday's sell-off as jitters about the US government's $700bn bailout plan for the financial sector set in and investors mulled the inflationary implications of the government plan.

The greenback felt the pressure as investors flocked to precious metals and oil. USD experienced the biggest one-day drop against the euro since the currency was formed nine years ago, whilst sterling hit a 3-week high against the dollar.

The flight to commodities forced investors who were betting on falling oil prices to cover their short positions due to the massive surge in crude oil.

Failure to do so would have resulted in traders being obliged to take physical delivery of the oil. The largest one-day rise on record saw oil jump to an intraday high of $130 a barrel before falling right back to this morning's opening price of $108.

Meanwhile, Alastair Darling took the opportunity at Labour's Manchester Conference to speak about the "unprecedented economic challenges" facing the UK, saying that he was committed to restoring financial stability through more stringent legislation and regulation of the financial system.

The market will be watching closely as the terms of Hank Paulson's financial relief programme are unveiled. Both he and Federal Reserve Board Chairman Ben Bernanke are due to testify before the Senate Banking Committee today.

Market data will probably take more of a back seat once again, with the most likely market mover being the euro zone PMI survey for September.

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Investors weigh up the Feds rescue package.

Friday saw initial gains made by the dollar slip away as investors weighed up the effects of the US government's colossal takeover of bad assets from financial firms.

US Treasury Secretary Hank Paulson highlighted the requirement to address the root cause of the current financial turmoil. He called for a government sponsored package that would effectively remove the illiquid mortgage assets "€˜that are weighing down our financial institutions and threatening our economy".

Under the draft Treasury plans, any financial institutions with €˜significant operations in the US' are eligible to sell or auction their bad debts to the Treasury fund – this morning, the scope of the $700bn plan was widened to include assets other than mortgage-related securities.

Although the change to include other devalued assets may force an increase in the size of the package as the legislation proceeds through Congress, George Bush defended the plan, saying the cost to taxpayers of shoring up markets was better than the alternative of job losses and diminished pensions. Ben Bernanke and Hank Paulson will provide testimony to Congress this week.

Meanwhile, fears that Morgan Stanley and Goldman Sachs would not be able to survive the continuing pressure have been allayed by the Federal Reserve granting their requests to change their regulatory status.

Last night, both become bank holding companies, allowing them to take deposits from investors as opposed to using borrowed money “ the leverage that led to the undoing of Bear Stearns and Lehmans. The move concluded that there is no future remaining in investments banks now that investors have determined the model is broke.

The dollar fell against most major currencies, except the yen, as risk aversion receded. The weekend press emphasised that the implications of the US bailout plan could undermined the dollar due to the inflationary impact and the fact that US Treasuries would be less attractive to foreign investors and central Banks.

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