Fear factor returns

Despite good economic data yesterday from the US in the form of US pending home sales and Manufacturing ISM the market flipped into negative mode.

There is no one reason for this shift but a culmination of reasons and this led to equities tumbling and Oil and commodities falling; the main losers were the banks as fears rose on renewed balance sheet concerns. 

September was previously touted as the month for stocks to fall and the first day of the month definitely backed up this prediction. Concerns over the sustainability of China’s growth were a big factor and also discouraging data from automakers. 

In the markets we witnessed further strength in the USD and the JPY as the risk aversion trend came into play. GBP/USD moved from a morning high of 1.6350 to a low of 1.6111 and EUR/USD retreated from 1.43 to 1.42; GBP/JPY fell back under the 150 level as the positive YEN feel on the new leadership continued coupled with strength on the back of risk aversion. 

USD/JPY moved into 92.00 levels and this brings the 90.00 level into focus again.

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Cautious traders sell the FTSE's summer rally

FTSE 100 property stocks came tumbling down after JP Morgan put out a damning note, saying the real estate rally was unsustainable.

UK based property stocks have risen 98pc since March, their strongest rally in 34 years. The analysts said the overall sector was 14pc too expensive, with the UK looking particularly vulnerable.

"We call for caution and recommend focusing on fundamental value because we believe the current rally is likely to end rather unhappily," they said, forecasting a possible 41pc correction in prices.

"The market remains distressed, in our view, and has not degeared enough, triggering the risk of future equity raisings or an acceleration in forced sales."

Liberty International dropped 19½ to 504½p. Hammerson was off 15 at 390p. Mid-cap Taylor Wimpey toppled 4¼ to 48p, Redrow was 14¼ lower at 233p, while Barratt Developments slid 16½ to 229½p.

Pub companies with their large property portfolios also took a pasting. Enterprise Inns sunk 8¼ to 158p, while Punch Taverns was 5½ lower at 125¾p.

Traders returning from their holidays were cautious after the furious bull run of the summer months, ploughing into pharma and tobacco stocks and selling risky banks.

The FTSE 100 struggled for direction in early trade, only to start heading south after the publication of PMI data, which showed a surprise drop in British manufacturing last month.

After a near 20pc rise since early July, the FTSE 100 fell 89.2 points to 4908.9. The mid-cap index shed 197.83 points to 8817.51.

Sentiment was further shaken after Paul Tudor Jones, the billionaire US hedge fund manager, said he did not believe that an economic recovery was under way.

Brent crude was down by almost $1 to under $69 a barrel in late trading on Tuesday. Oil major BP followed suit, losing 12½ to 519½p. Shell was 19p lower at £16.55, and Tullow Oil slipped 33p to £10.44. 

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The perils of bangers for cash- Chinese style

Say what you like about the Chinese, they certainly know how to do economic stimulus.

The 3.9 per rise in British private car sales in June announced this week was hailed as a great success. It was clear evidence that the labour Government’s “bangers for cash” car scrappage scheme and other efforts to revive the economy were starting to work.

Big deal. In China, June car sales were up whopping 48 per cent. Now that’s what I call a stimulus.

It just shows what you can do when you own the banks. Yes, I know we own our banks, too, but that’s different because labour are too incompetent- and broke to do anything that really works.

When China decided it needed a stimulus package, it chose to create one by ramping up government spending and opening the lending spigots.

Bank chiefs were told to flood the economy with credit and competed with each other to get the most money out the door. The result was a tidal wave of cash, with bank lending in June twice the level in May.

The authorities are now worried about inflation, a property bubble and future bad debts. But it has kept the economy growing at a decent lick despite the slump in exports. This is good news for many foreign companies, particularly carmakers. Jaguar Land Rover will this year sell many more than the 12,456 vehicles it shifted in China in 2008.

But China’s growth may actually be a net negative for Britain in the short term because of its impact on commodity prices. As Barclays Capital pointed out in a recent report, the effect of Chinese growth on the price of oil and metals seems disproportionate to its share of the world economy.

For the British economy, the near-doubling of the oil price in the past six months is a high price to pay for selling a few more Jags.

Although the oil price has fallen back by more than $10 a barrel in the past two weeks, economists warn that at above $60 it is one more reason to be nervous that flickers of life in the British economy could be snuffed out.

Recent signs have been discouraging, notably the 0.5 per cent fall in factory output in May published this week.

Against this background, yesterday’s decision by the Bank of England’s Monetary Policy Committee not to extend its quantitative easing programme was a surprise.

The purchases of bonds using newly created money have had limited impact so far.

The Chinese are clearly storing up serious potential problems in the future. But the British economy is still in such a fragile state that there remains more risk in doing too little than too much.

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Wall ST slides ahead of earnings season

US stocks fell to their lowest levels in two months on Tuesday as investors sold shares ahead of the start of the second quarter earnings season.

Confidence in the economic recovery was knocked by talk of a potential second government stimulus plan after Laura Tyson, an economic adviser to president Barack Obama, and House Democratic leader Steny Hoyer both suggested there could be merits to such a package.

Economic fears and a strong dollar took its toll on commodities, with the price of oil falling for a fifth consecutive session.

Energy producers followed, and Schlumberger dropped 4.4 per cent to $49.20 while Exxon Mobil lost 2.3 per cent to $66.56.

Industrial stocks also suffered, and General Electric gave up 4.1 per cent to $11.01.

The benchmark S&P 500 closed down 2 per cent at 881.03, while the Dow Jones Industrial Average lost 1.9 per cent to 8,163.60 and the Nasdaq Composite gave up 2.3 per cent to 1,746.17.

That came after sharp selling in the afternoon as the S&P fell below its 200-day moving average, which is seen as a key support level.

Analysts predicted that the market would remain subdued at least until Thursday, after Alcoa has reported its results.

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Hesitant start for Asian markets

Markets got off to a hesitant start Monday as investor doubts on the staying power of a global recovery kept Asian stocks soggy and currencies subdued ahead of a much expanded Group of Eight meeting this week.

Japan’s Nikkei slipped 1.58 per cent to 9,661.27, while the MSCI index of Asia ex-Japan eased 1.1 per cent to 319.61.

The air of caution kept the US dollar and bonds supported as safe-havens, while pressuring commodity prices. Crude oil futures were down at five-week lows of $65.00 a barrel.

Investors were still smarting from last week’s dismal US payrolls report which put a question mark over the recovery there, and thus across the globe.

Stock bulls had been hoping for something more ”V”-shaped and the disappointment was clear in Thursday’s 2.9 per cent drop in the S&P 500. Having skipped a session on Friday for the Independence Day holiday, S&P 500 stock futures were off 0.86 per cent in Asia at 885.90.

That implied the cash index was perilously close to breaking major chart support of a head and shoulders pattern.

Investors were also wary ahead of the Group of Eight summit in L’Aquila, Italy on July 8-10, which has been expanded to include China and a host of developing nations.

China last week floated the idea of discussing the US dollar’s place as the sole international reserve currency, causing a brief dip in the currency.

The G8 pushed back, however, with a source telling Reuters there was no appetite for such a momentous change.

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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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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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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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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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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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Wise Money starts with the positive news

Tomorrow sees the inauguration of Barack Obama as US president which the entire planet hopes will be the first step towards global recovery.

The signs initially look good with a determination to do the right thing and do it early. A feel good factor might easily spread very quickly through the country and filter to a stronger Dollar over the coming months.

The assistance to both Banks and economies being pledged by Governments worldwide is also being viewed as positive with expectations that it will directly enhance Corporate earnings which in turn will boost equity markets.

On the downside, the situation in the world's largest financial institutions is still very unclear. Further assistance for Bank of America and a restructuring at Citibank at the end of last week plus the release of the details for the next UK bank bail-out plan, this morning have done little to alleviate concerns in Financial Markets.

One interesting result of the economic downturn is the widening disparity between the price of Brent crude and West Texas Intermediate oil prices given that the product is essentially the same.

As the historic global benchmark for crude, WTI always enjoyed a bit of a premium over Brent but with recent massive oversupply in the commodity, this has dissipated and reversed. Recently oil traders have been pricing some of their deals against contracts other than the WTI as they claim that the price is being adversely distorted by record inventories at its landlocked delivery point.

Until economic activity begins to pick up again, this differential looks likely to remain.

Focusing on currencies, today we have seen some of the recent Sterling sheen being worn away. Given that the Euro is as weak as last week then this can viewed as a shift away from sterling short term investments and can likely be directly attributed to a knee-jerk reaction to the Government's latest Bank bail out plan. Sterling will probably reverse this move during the week. All else quiet given the shortened trading day.

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How low can things get?

Strolling towards Lower Thames Street yesterday evening, the Evening Standard sales placards' were shouting "Interest rates To Go To 0%".

Going back a few hours, Mervyn King, fronting the BoE at their release of the Quarterly Inflation Report, made it very clear that the Bank views the risks in the economy at present to be growth or rather the lack of it.

He stated that inflation next year would fall to 1% with a possibility of it actually going negative in the 12-18 month timespan. This meant that interest rates would be cut further and sooner rather than later. HSBC this morning are calling for a 50bp cut at each of the next 4 MPC meetings.

Personally, I think that is too much. I can see real interest rates being cut to zero but with core inflation still sitting at a tad above 2% and not really moving, I feel a further 100bp cut would be ample.

Talking of Money Markets, the coordinated rate cut that I earlier mused might follow this weekend's G20 meeting in Washington is still on the cards even more likely should tomorrow's Eurozone GDP figure come in as dire as is being predicted. Let's get the cuts out of the way and we can all settle down to enjoy the festive season.

In the US, Paulson is still fiddling with his Banking rescue package, now deciding that the fund will not be used to buy distressed assets but rather, and in line with European examples, to purchase stakes in Financial Institutions.

This marks a complete u-turn from the original announcement and could be the catalyst that starts freeing up the lending within the US.

Oil remains on a slippery slope with Brent crude at one point, a whisker away from $50 per barrel. As has been made clear in the past, cartels don't really work during a period of rapidly declining prices.

Although OPEC talk a good game, cutting production quotas in order to put a floor under the price, the fact is that the smaller members maintain or even increase production in order to sustain their revenue.

What else? Oh yes, cable plunged through 1.50 on its headlong rush down and the Sterling Trade Weighted Index fell to a 12-year low this morning as traders took on board the BoE comments from yesterday. We saw a low of 1.4807 in USD/Sterling and 1.1919 in Sterling /Euro.

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Emerging markets close to crisis

With increasing fears of a sustained Global recession developing, we saw European indices close sharply lower yesterday, with the FTSE closing down 5.7 percent, German DAX losing 4.9 percent and Frances CAC shedding 5.9 percent.

This was not reflected on Wall street where the Dow Jones Industrial average closed up more than 4 percent on the day. This was underpinned by positive earning signals from companies such as IBM, Google and Advanced Micro Devices.

There was also a feeling from some investors that certain stocks are cheap at these prices.

On the currency front, price movements remained volatile with poor liquidity , making it hard to find any near-term direction.

The US Dollar sagged against the euro but held steady against another perceived safe haven currency the Japanese Yen.

Sterling has climbed slightly against the Euro but has no real impact on the Dollar. At the time of writing Sterling/Euro trades at 1.2895.

Overnight oil rose more than $3, rebounding from a 15-month low below $70 on a late rally on Wall Street and growing expectations of an OPEC production cut.

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Global Equity Meltdown

Last night equities tumbled, with significant falls in US and Asian markets.

American stocks shed nearly $900bn in market value with the S&P 500 falling for a seventh consecutive day, the longest spell of intraday declines since 1996.

The Dow Jones Industrial Average closed below 9,000 for the first time in five years.

Tokyo witnessed its largest one-day drop since 1987 as the Nikkei fell 9.6% while the Hang Seng hit a three year low. Shares in Australia slid 8.3%.

In currencies, Sterling fell against the Dollar and Euro amid concerns over the UK economy after the IMF delivered its verdict that the UK could be one of the countries hardest hit by the global downturn.

The Yen fell following a return into high yielding currencies on the back of Tuesday's concerted rate cuts by central banks. Three month Libor has continued to rise slightly despite the coordinated action.

Oil prices decreased yesterday to $87 a barrel while the price gold fell below $900.

G7 ministers meet today to discuss measures to address the lack of confidence in the global economy. Thus far the action taken to restore market confidence has failed to yield any significant positive results, reflected in the falls in equity markets and high Libor rates.

There is market speculation that Alistair Darling may propose the option of other nations guaranteeing lending between banks in an effort to ease markets.

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Uncertainty and weak data weigh on markets

Another day of uncertainty surrounding the US government's $700 billion financial rescue plan coupled with the worsening global economy weighed on markets yesterday.

European stocks which had been in positive territory were dragged down by Wall Street stocks as investors fell prey to the concerns enveloping US markets. The FTSE100 lost ground in afternoon trading to post a 1.8% decline, the Dow and S&P500 finished 3.2% and 4% lower respectively.

It would appear that market participants are becoming cautious that even if the bailout bill is passed, it may do little to affect the rapidly weakening global outlook.

Republican leaders are currently attempting to persuade their party members to back the rescue package before it is put to vote in the House again this Friday. While the democrat party may be reluctant to take the bill before lawmakers unless they are sure of success. However, recent comments would suggest that there is more chance of the bill being passed than not.

The first data release from the US showed there was no change in the direction of US jobless claims, which increased to 497k from the previous weeks 496k. This is the highest level in seven years and offers an indication of how the financial turmoil is hitting the real economy.

Lower than expected factory orders also signalled that the US economy is grinding to a halt as businesses pullback spending. The 4% drop for August was the most in almost two years.

The European producer price index provided more evidence that inflationary pressures are easing in the euro zone. Prices rose 8.5% in August from a year earlier, compared to last months 9% increase and the monthly figure dropped 0.5%.

Data from Nationwide illustrated the largest decline in UK house prices since the survey began in 1991. The year on year number came in at -12.4% and the monthly number at -1.7%.

After the European Central Bank announced their decision yesterday to keep the benchmark rate at 4.25%, Trichet said that the financial market turmoil is dampening economic growth and inflation risks have diminished. Having taken a while, it appears that the governing council has finally changed sentiment and it could be suggested that this is a clear sign that a rate cut is in the pipeline. Possibly before year end.

Trichet's comments helped the euro to a 13 month low against the dollar, declining for a fourth consecutive day against the greenback. The pound looks to be heading for a 4 percent drop against the dollar this week. Sterling is little changed against the euro.

Crude oil continued its fall yesterday. The November Nymex futures contract has declined 13 percent so far this week and it is difficult to see any upside given the likely slowing in demand as the US flirts with recession.

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Bush applying pressure on Congress

In the latest development on the US Treasury's $700 billion bail out, it appeared yesterday that the Bush administration is increasing private pressure on Congress to approve some form of rescue program.

It was reported that Treasury Secretary Henry Paulson spent much of yesterday meeting with, and contacting lawmakers to persuade them on the benefits of the package to mainstream America and not just to Wall Street banks.

The news was taken as a positive sign by markets that the plan will be salvaged and that there could be an approval before the end of the week. This allowed US equities to record their biggest one day gain in six years after the S&P 500 index increased by 4.7% and the Dow posted gains of 5.2%.

Asian stocks also benefited from the news to pare some of the previous days losses with the Nikkei finishing 1.2% higher.

Admittedly, the release of economic data is having next to no impact on market movements at the moment however yesterdays releases did paint a slightly mixed picture.

In the UK, consumer confidence stayed close to a record low in September with a reading of minus 32 and GDP was confirmed as flat for the second quarter of this year. Euro-Zone inflation eased to 3.6% YoY for September. While in the US consumer confidence unexpected rose in September with the index increasing to 59.8. Other US releases showed that home prices fell and business activity slowed.

The growing expectations that the Bank Rescue Plan will be agreed in the coming days, resulted in the dollar trading near a two week high against the euro.

Oil jumped $4 a barrel yesterday on the back of the strong equity rally, which also supported the US dollar strength.

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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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UK Government to assist Lloyds takeover of HBOS

Lloyds TSB last night sealed a £12.2bn takeover over HBOS, the UK's largest mortgage lender.

The labour government, who was active in negotiations in the 232p all shares deal, has waived competition rules to allow the merger. In the US it emerged yesterday evening that Morgan Stanley is in preliminary talks with Wachovia in another possible merger.

Earlier in the day the $85bn rescue deal of AIG had failed to negate anxiety in the equity markets as investors sought the traditional safe havens of US Treasuries and gold. Short term yields fell as low as 0.2 per cent while bullion prices gained 11.4 per cent.

The S&P 500 index shed 4.7 per cent while the FTSE 100 closed below 5,000 for the first time since June 2005. Asian trading overnight continued the trend as the main indices all lost ground while the Russian government closed the country's two main exchanges to halt declines.

In currencies, the Dollar fell against sterling, the euro and the yen on the back of the concerns over financial stocks while sterling lost ground on the euro after unemployment figures reached their highest levels since 1999.

Oil prices rose as inventories fell more than expected, with West Texas and Brent reaching $97 and $95 per barrel respectively.

Central banks have responded to the concerns in markets by announcing coordinated action ‘designed to address continued elevated pressures in US Dollar short-term funding,' in a joint statement made this morning. The Bank of England will offer further overnight loans in an effort to aid liquidity.

The release of the minutes of the Monetary Policy Committee's last rate decision revealed a slightly more dovish stance with Besley no longer calling for a hike while committed dove Blanchflower raising his cut call to 50bps. The voting showed an overall 8-1 majority in favour of holding rates at 5.25 per cent.

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Oil Producers feel the pinch

It didn't take long for the more radical OPEC producers to start squealing that a production cut was needed to safe-guard the $100 per barrel level.

We continued the slide towards this price overnight and start the day at around 108. To be honest I would have thought that both producers and users would be more than happy for oil to stabilise at about $100 and that a reduction in ‘speculative volatility' would enable the global economy to plan for growth whilst still allowing Manchester City to tear the football transfer market apart.

As before, the Dollar was the main beneficiary of the move lower in commodities with cable and euro/dollar both lower on European opening.

We are now getting into interesting territory in the Money Markets. The OECD, in a report issued yesterday, announced that in their opinion the UK would be the only one of the major global economies that would go into recession.

They predicted that the UK would see negative growth in both the 3rd and 4th quarters, the implications being that, in tandem with Prof Blanchflower's thinking, interest rates would need to come down and sharpish.

We still think that this month's MPC meeting will produce another split vote possibly 3 to“ 5 to€“ 1 (with 3 for a cut, 5 on hold and 1 still concerned about inflation) but that we will see a cut in October with more to come next year.

With the yield curve still very much higher than official rates there will be some downshift with the likelihood that the curve itself will become negative as we head towards next year. Time looks ripe to push Sterling deposits out slightly longer before rates come down. In the US there have been calls from certain smaller banks for the Federal Reserve to increase the Discount Rate, putting borrowing costs up.

This has been done before to apply a temporary brake for the economy but would have no tangible effect on Money Market rates unless the Fed Funds target rate was moved in tandem. There still looks more chance that rates will need to be eased however with the current more buoyant mood in the US proving temporary.

On the exchanges, several of the smaller Far Eastern Central Banks intervened in the Forex market to sell Dollars in support of their currencies (Malaysia, Indonesia, India and The Philippines were mentioned, whilst South Korea were verbal interventionists).

The selling was not deemed to be part of any concerted action and as such likely to be just a smoothing operation to control the move. In Europe today, if commodities keep falling then the Dollar will strengthen further. We are now within the congestion area for Cable mentioned yesterday and it is probable that without a further down move in Euro/Dollar, cable's fall will slow and profit taking could become a reality.

Trouble is, in the current environment, any move back to/above the 1.80 mark will likely prove to be in market terminology ‘ a dead cat bounce'. SterlingEuro is holding on by its fingertips. There is some good data out today, with several PMI indicators from Europe this morning plus the 1st estimate of the Q2 Eurozone GDP. This afternoon we have US factory orders and after we go home, the US Fed Beige Book.

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Hurricane Gustav runs out of puff

Hurricane Gustav was downgraded in terms of severity last night as it continued its move across the Gulf of Mexico and towards the multitude of offshore oil installations and Louisiana.

This saw an aggressive sell off in the crude oil market with spot prices for WTI falling to below $110 per barrel this morning. Gold duly followed, just holding above $800 per oz and, as has been the case recently, the Dollar made big gains against all major currencies.

Cable hit its lowest point since April 06 with strong option related support at 1.80 far less than had been presumed. The BIG problem for Sterling at present is the worry that if the Chancellor is concerned about the UK economy being on the rocks, then what glimmer of hope can there be?

Sterling accordingly weakened in its own right against the Euro (to an all time low since the currency's introduction) and against the Yen (which suffered against other majors on the resignation of the Japanese PM, Mr Fukuda).

Elsewhere, the Aussie Dollar suffered on a double whammy with the RBA cutting their interest rates by 25bp, with the implication of more to come, adding to the selling that followed the sharp drop off in the gold price.

Sterling interest rates continued to dribble lower in the 6-12 months range as expectations continue to build that the MPC will not be able/willing to hold off cutting rates for too much longer. It looks unlikely that we will see a cut this week although the arguments for a reduction are likely to be more vociferous than for some time.

It is quite likely that one or even two other members will vote for a cut alongside the habitual dove, Prof Blanchflower. This will only serve to further undermine Sterling on the exchanges. Interest rates elsewhere continue to do very little with no move expected from the ECB at this week's meeting and no change until the autumn at earliest in the US (market looking for a small rise by year end).

Today we are very light on data although the relative Construction releases from the UK and the US will be watched. Both are expected to indicate a weakening in the respective markets with the US being the more likely to surprise on the upside.

Also Gordon Brown is expected to announce Part I of the Rescue Package for UK plc. This has of course been well anticipated but the fear in the City is that any help will stall due to lack of available funds.

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Hawkish ECB comments

In comments yesterday from the ECB, Webber from the governing council sounded out a hawkish tone, stating that much discussed rate cuts in the Eurozone are being expected too early.

The ECB has started to concentrate its concerns about operational issues on the collateral system: with comments again from Webber that 'The collateral that we take must also be traded in the market becasue only then is it priced accurately' . This may lead to ultimately tightening lending standards, showing unlikely good news for the economic growth in the EMU.

Further comments from the ECB vice-president Papademos also warned that further rate rises may be needed if second round effects materialised in the Eurozone. Remarks from the other ECB members, Bini Smaghi and Bonello, all suggested the central bank is attempting to temper market expectations of rate cuts ahead.

The USD was not helped yesterday by the hawkish comments yesterday from the ECB, raising the prospect of an interesting ECB policy decision next week, this continues the confusion over which path we will see currency rates take.

The broad decline in inflation and inflation expectations has lessened the need for rate hikes but this is evident in all G10 economies. With the US economy arguably in a more advanced stage of economic adjustment and with the Fed having already eased aggresively, the pressure is building on the Eurozone and other G10 economies to seek a more accomodative policy ahead.

The hawkish commentary will be increasingly unjustifiable and we see little scope for the significant yield gains in favour of the Euro.

Crude oil prices continue to edge higher, breaching $119/bbl off the back of feas over the disruptions from Tropical Storm Gustav, which is expected to strengthen into a major hurricane in the Gulf of Mexico.

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Weak IFO expected....

The Euro fell for a third day against the dollar on speculation the IFO Business Climate report will show today that confidence has slumped in Germany to a three year low.

The currency traded near a three-month low versus most major currencies and towards a six month low against the dollar with concern credit-market losses and slowing exports will stop the European Central Bank from raising interest rates this year.

The US dollar grew stronger on Monday and early Tuesday on the speculation of a weak German IFO survey, but could well decline later today with expectation of Sales of new houses in the U.S. likely to have fallen in July as mortgage lending dried up.

US homes purchases are expected to have dropped 0.9 percent to a 525,000 annual pace. Mounting losses on subprime mortgages have caused banks to withhold credit and boost borrowing costs, hurting demand even as prices are falling and making houses more affordable.

The decrease in sales has signalled the worst real-estate slump in more than quarter of a century.

The Pound fell against the dollar again on Monday, extending a fifth week of declines, the longest continued drop since February 2006. The UK Currency, slipped to its lowest level since July 2006 as effects of last weeks government report showed economic growth stagnated in the second quarter.

The report also added pressure to the Bank of England to set aside concerns about inflation and cut its benchmark interest rate, currently at 5%. With the UK inflation rate at more than twice the 2 percent target, the Bank of England have been reluctant to lower interest rates, and understandably so.

The Australian and New Zealand dollars continued their recent declines as concerns credit-market turmoil will widen prompting investors to sell higher-yielding assets funded in the Japanese currency.

The New Zealand dollar fell to its lowest level in over a week, and the Aussie dollar to a four month low against the most traded currencies on speculation that the nations bank will cut Australian interest rates from the 12-year high of 7%.

Crude oil was little changed after rising yesterday as Tropical storm Gustav formed in the Caribbean Sea, raising concerns it may disrupt production at oil fields in the gulf of Mexico.

Gustav has strengthened to near hurricane force with winds about 70 miles an hour and was moving towards the gulf. Prices also rose after Russian lawmakers voted to recognize the independence of two breakaway Georgian regions, increasing the prospect of further tensions in the area.

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Dollar rally stalls

The dollar came off recent near term highs on the back of oil's jump to a 2 week high.

The higher oil price was prompted by a combination of heightened geopolitical uncertainty stemming from Russia's decision to halt cooperation with NATO and warning that Saudi Arabia may scale back its recent increase in production.

The once resilient Euro zone economy is succumbing to the downward pressures of a strong Euro, a slowing global economy, high oil and food prices and tight credit conditions.

According to 2007 GDP estimates, the IMF expects the world's largest economy to grow at only 1.7% in 2008 and 1.2% in 2009 compared to 2.6% in 2007.

The main reason the ECB is not cutting rates already is because inflation is well above a level consistent with price stability and the central bank wants to avoid second-round effects of energy prices in wage and price setting.

Will we see EURUSD back at 1.40? The Euro has been very weak over the past month and this trend is expected to continue.

The Eurodollar has fallen from highs following a shift of interest rate expectations in favour of rate cuts by the ECB and rate hikes by the Fed. The market is predicting the Fed to increase rates by 75bp over the next eight FOMC meetings.

Today, Fed Chairman Ben Bernanke will be scrutinized for hints on future policy moves and any indications of support for Fannie Mae and Freddie Mac.

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Dollar strength prevails

In overnight trading, the RICS House Price Balance from the UK declined less than expected in July, printing at -83.9% versus -90.0%.

On balance, the improvement is marginal considering the magnitude of the decline in prices. Real estate demand has collapsed as buyers are unable to obtain credit to finance purchases. Indeed, June's Mortgage Approvals dropped to the lowest level since at least 1999.

The U.S. dollar is maintaining a timely advantage over major currencies, as the job done by the Federal Reserve and the Treasury department to stimulate growth is beginning to produce some results.

Crude receding from recent highs (5-month low yesterday at $112.72) should support the currency over the short/medium term, while bad economic numbers are already discounted in recent lows. The European officials, at the contrary, prefer to adopt a wait and see approach.

Data released yesterday showed a record surge in the cost of production in the UK and reinforced the expectations that the inflation headline will hit 5 % over the summer.

The Bank Of England is largely expected to make a harder stance in its inflationary report. Some traders are of the opinion that the BOE has no other choice but to cut interest rates, rise inflation expectations and downgrade economic growth this year and next year in spite of mounting fears of recession.

Aside from the much headlined UK Consumer Price Index where expectations are for a 4.2% rise, the market will likely pay closer attention to the continued slide in oil prices as well as the escalating conflict between Russia and the Caucasian republic of Georgia.

The dollar tends to attract capital at times of geopolitical tension because the US remains the dominant global military power.

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Wise money eyes on US Non farm payrolls today

Gloomy new housing data released by the Nationwide Building Society yesterday reporting its ninth consecutive monthly fall.

It also announced the largest year on year fall in property values since the early 1990s indicating the severity of the UK housing market can not be underestimated. UK PMI data is out today at 9.30 it is expected to show a drop to 45.5 from 45.8 in June showing further contraction.

The dollar experienced a big sell off yesterday after US weekly jobless claims came out lower then expected and further data was released showing the US economy grew less then anticipated in Q2.

The Q4 figures have now been revised to show a contraction of 0.2% rather then the expansion of 0.6% as previously set. The Labour Department reported the number of US workers filing for unemployment benefits increased by 44,000.00 last week bringing the figure up to 448,000.00. GDP grew at a 1.9% annual rate, up from the 0.9% recorded in the previous three months, down from the level of 2% forecasted.

The Commerce Department announced ‘for economic growth to pick up later in 2008 and in the years ahead, we must have good tax and energy policies.' This also impacted on US stock which opened lower in the market yesterday. US non farm payrolls will be out at 13.30, the market median is expect to show a decline of 70,000-75,000. Following on from this data the ISM manufacturing data will out at 15.00.

This morning it was reported that German retail sales fell more then expected by 1.4% for the month of June with consumption, investment productions and exports all weakening for this period. Euro zone inflation escalated to another record high in July coming out at 4.1% year on year.

The inflation level seems to be moving further away from the ECB's target inflation level of 2%. This inflation level is the highest since 1997 and will leave the ECB with a tough judgement next week.

Oil fell to $124.08 per barrel yesterday; this has been the biggest one month fall for oil since December 2004 off the back of negative US data.

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The central banks are working together

The dollar was given a boast by the US ADP employment change reporting 9000 jobs were added to the private employers sector for the month of July.

The ADP report which was forecast to show a fall of 60,000.00 jobs surprised the market with the figures hitting the positive mark. For a further day the dollar has exceeded expectation to bring some well needed assurance back to the market; however this is not to be mistaken as a future trend for the dollar.

Importantly this report comes in advance of Non farm payrolls on Friday where analysts are already predicting a loss of 75,000 jobs.

The Fed revealed a strategy to expand its lending scheme for the fourth time in five months to struggling financial institutions. This scheme was set to mature in September but the Fed has decided to expand it for a further six months.

Also the scheme which allows investment banks to swap their badly trading securities for treasury bonds under the Term Security Lending Facility will be permitted until January of next year. The Fed has also expanded its loans under the Term Auction Facility for banks selling 84 days loans in addition to their 28 day loans.

It suggest that despite positive US employment figures the Fed who are the best placed to access the US economy still views it as very much a fragile market.

The European confidence figures were released yesterday; the figures were much worse then expected toppling five year lows. The European Commission said confidence fell to 89.5 points it's lowest since March 2003.

These figures have been the latest in a long line of negative data for the eurozone and will weight heavily on the ECB's decision on Euro interest rates next month. The expectation in the market is still for interest rates to remain stagnant for the next few months at 4%.

Important to note the ECB and Swiss Central Banks in conjunction with the Fed have also extended liquidity policies. In particular they are to auction dollar loans to European institutions for the 84 days alongside the 28 day loans.

The speculation around oil is still apparent with oil rising to $4.58 to $126.77 yesterday. News that crude oil inventories declined by 100,000 last week seems to be the main driver of this market movement.

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The Dollar rallied sharply yesterday on hawkish comments from Paulson and Plosser

With little in the way of economic data yesterday comments from Treasury Secretary Paulson and Philly Fed President Plosser were always going to be a key focus for dealers and neither man disappointed.

Henry Paulson churned out the familiar party line that a strong dollar is important to U.S. interests and the underlying strength of the economy while Charles Plosser said that rising inflation could force the Fed to start raising interest rates before labour and financial markets recover.

Oil also played a part in the dollar's rise as the price of a barrel of oil dropped $4.63 to a six week low of $126.40 as fears of tropical storm - expected to turn hurricane - Dolly hitting oil production sites in Texas receded.

Reaction to Paulson and Plosser was enough to offset an earlier slide in the dollar triggered by weaker than expected earnings announced by Wachovia. America's fourth largest bank reported a record US$8.86 billion second-quarter loss and slashed its dividend for a second time this year.

Wachovia had projected a US$2.6 billion to US$2.8 billion quarterly loss and added to the gloomy news by announcing it will slash nearly 11,000 jobs.

The jobs news does not bode well for the US non-farm payrolls report due out next week which has already shown that the US economy has shed a total of 438,000 in the first six months of the year.

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To grow or not to grow?

Oil came off further yesterday at one point below $130 a barrel.

Rather than being a reduction in demand for oil it seems more centred on US sentiment that they would dip into their own strategic supply if necessary. On the back of this drop, the US Dollar made gains and the Dow Jones recovered somewhat, moving away from bear market country.

Oil was not the only mover with natural gas coming off recent highs to levels not seen since early May. It was also a much better day for equity markets with house builders and banks both making gains from their previous deflated levels.

Today we have seen the German Producer Prices Inflation figure which reported the highest rise in 26 years. As with other global PPI increases, this sharp rise is again on the back of high commodity and energy prices.

Since the release of the figures, Trichet has been talking about the lack of sustainable growth within the EuroZone now being the main focus.

This is starting to become a common trend amongst Central Bank Heads with Bernanke, King and now Trichet all indicating that they are not looking to try and manipulate inflation in the short term (a futile exercise anyway) but to concentrate on ensuring that growth is the immediate focus.

On the currencies Dollar sentiment is still somewhat tarnished as confidence in the US remains frail. The Fed's reluctance to increase rates, even with inflationary pressures, will have a knock-on effect on the Greenback.

As there is no data out from the US the main focus today will be the Dow Jones opening and the effect that Merrill Lynch's numbers release will have.

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Dollar weakness prevails

The value of oil came off yesterday, at one point down by $10 a barrel after concerns were again expressed about the state of the US economy and that this in turn, would lower demand for crude.

Bernanke's speech warned of "downside risks" to growth and "upside risks" to inflation causing the volatility in the oil and equity markets as the Dow and FTSE both made large losses on the day.

Yesterdays Retail Sales in the US saw a slight increase at 0.1% and if you strip out gasoline a decline of 0.5%. The US today sees CPI figures released expected to be around a 0.7% an increase to 4.5% year-on-year.

We will also see the FOMC meeting minutes which, after Bernanke's testimonies should not give much more away, other than the views of some of the more hawkish Fed presidents.

The EuroZone sees the HICP inflation indicator this morning and is expected to remain at 4% again down to commodity, energy and food prices rising. The medium term goal for the ECB is to keep inflation at or below 2% so could we see another rate hike next month, or is growth going to be the overriding factor here?

At home today not too much data, we have the Unemployment figures expected to be up slightly around 10,000 extra claimants. Gordon Brown is meeting with the Nigerian President today regarding their oil crisis. Another interesting article in the Telegraph today indicating a 40% chance of a 0.25% rate cut at the beginning of next month.

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.