Sterling sinks below 1.50 again

The consolidation period for Sterling did not last long with overnight Asian trading and so far this morning it has been under selling pressure again. 

The reason for the fall today has again been attributed to narrowing polls showing that Labour and conservatives are "neck and neck". 

In addition credit rating agency Fitch has stated that the UK sovereign credit profile has deteriorated and Moody’s has warned that some UK banks could face downgrades. 

To top it off we have received poor economic data with UK RICS house price balance coming in weaker than expected and the UK January trade balance was also weaker than anticipated.

Elsewhere the euro has come under some pressure too against the USD and the JPY. 

Although the Greece situation is becoming yesterday's news, there are a number of other economies to replace Greece such as Portugal and Italy for starters. Expect the euro to remain under pressure for the foreseeable future.

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Pound's falls push FTSE close to 18 month high

Vodafone led the risers on Friday as the telecoms giant was identified by Goldman Sachs as one of stocks that should be a major beneficiary of the pound's weakness against other currencies.

 
In fact, Peter Oppenheimer, strategist at Goldman Sachs, has taken a favourable view of the whole London stock market. 

 

This is because the FTSE 100 generates around 70pc of earnings from outside of the UK and the FTSE 250 has a significant weighting of industrial cyclical sectors that would benefit from a relative competitive boost owing to a weaker sterling.
Overall, the blue-chip index jumped 49.15 points to 5533.21 and the mid-tier put on 13.52 points to 9612.17.
Standard Chartered led banking shares higher after its annual pre-tax profits narrowly beat analysts' forecasts. The shares put on 84p to £16.74. The positive sentiment boosted other bank stocks. Barclays rose 8.1 to 329.9p and Lloyds Banking Group ticked up 1.3 to 52.7p. 

 

Elsewhere in the financial sector, life assurers rallied. Indeed, Prudential perked up 12½ to 500p as bargain hunters looked to exploit the 20pc fall from earlier in the week. Talk that Temasek, the Singaporean sovereign wealth fund, is preparing to underwrite the company's huge rights issue helped restore confidence.
In the oil sector, dealers continued to chase Tullow Oil higher on takeover speculation. The gossip doing the rounds earlier in the week was that BP, up 3.9 to 604.1p, is preparing a bid. Tullow put on 24p to £12.65.

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Sterling crashes through 1.50 to US Dollar

After being sold aggressively across the currency markets yesterday the markets have taken a breather and we now await the next move. 

The political focus with the opinion polls over the weekend indicating that the chances of a hung parliament were much higher. A hung parliament may actually prove successful, however the markets do not like uncertainty and the consensus is that a coalition government will have less political clout to push through the decisive decisions especially in relation to tough fiscal planning which is inevitable.

The Conservatives have come out of the traps today stating that protecting the AAA status is central to their plans- however some feel their proposed aggressive cuts will be detrimental to recovery. 
 
On the other hand Labour propose to wait and cut later but waiting too long could mean that the horse has already bolted and the AAA rating could be lost. So this uncertainty and division is leading to a weaker pound. 
 
Yes this could be good for the UK economy and for recovery but there is a fine line between a weaker pound and the loss of confidence in Sterling and the UK economy- this would lead to a sharp rise in import prices and inflationary pressure especially if commodity prices remain high- not good; this would spill into a pressure on the UK gilt markets and inevitably the UK losing the AAA rating adding yet more pressure. 
 
So you can see the problem that uncertainty is creating. The Pound needs to get back above the psychological 1.50 level against the US Dollar. 

Sterling also lost yesterday on the purchase by Prudential of AIG’s Asian business which led to further selling of GBP and buying of USD in the light of this purchase. 

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Pound is pummelled in currency markets

A disastrous start for the Pound in the currency markets continues the bearish trend witnessed last week. 

The pound has dropped to a near 3 month low against the euro, a 10 month low against the US Dollar and a near year low against the JP Yen. 

The UK is under heavy selling pressure with unwanted attention and unease with the fiscal deficit combined with further indications that the general election will result in a hung parliament. 

A hung parliament would severely limit the ability of a divided parliament to act decisively on the UK’s deficit spelling danger for sterling. 

In addition to this the potential purchase of the Asian life insurance unit of AIG from Prudential is causing large negative M&A flows out of sterling and into the USD.  So all in all not a bright picture for the pound which is looking alarmingly fragile and dropping sharply.

The Greece situation is still ongoing- a few rumblings of solutions have dissolved into nothing leaving the markets still uncertain and leaning to the safe havens of the USD, JPY and AUD performing well on the hint of another rate rise.

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Sterling exchange rate lowers against the US Dollar

Fiscal concerns and the contining dovish stance from the MPC continue to weigh on the Pound. 

Throw into the mix increased political uncertainty with the narrowing of the polls and the future does not look bright for the Pound. 

Today we had members of the MPC commenting on the quarterly inflation report where the bank lowered its growth and inflation forecasts underlining a dovish stance on monetary policy. 

King was his usual cautious self and highlighted the fragility in the UK economy and reaffirmed that inflation is likely to come down later in 2010. On the deficit he did note that we have a very large fiscal deficit and that rating agencies are to remain "somewhat uncertain" until the deficit is tackled. 

King affirmed that he would be immensely surprised if rating agencies downgraded the UK.

Another MPC member David Miles noted that the decision not to raise QE was very finely balanced and this has contributed along with the dovish tone overall to sterling slipping 1% against the USD and over 0.5% against the euro.

Later this week we have important feedback in the form of the second revision of UK GDP and also important numbers from RBS and Lloyds- especially critical due to the government involvement. 

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Sterling softens as UK debt is in the spotlight

Sterling has lost over 1% against the euro and just under 4% against the US Dollar in the last month. 

The surprising move is the fall against the euro as the Greek fallout has held court in the media for sometime now and yet sterling falls against the euro. 

Weaker retail sales and weak business and mortgage lending have compounded the weak sentiment, however the real danger for sterling is the UK deficit. 

The economists are arguing with each other on whether to cut now or later- the common agreement is that cuts are inevitable but when? Economists should focus more on the how and what to cut and the politicians should lay their cards on the table with their full deficit reducing plans outlined now to avoid further uncertainty. 

The credit agencies want credible plans and not political or economic disagreement.

Lots of politics thrown into the mix over the weekend with news of a narrowing in the polls and Heseltine touting a hung parliament did not dent sterling further. However we can expect the election run up and the focus on the deficit to continue to affect the pound.

Sterling also lost further ground against the USD following the Feds decision to increase its discount interest rate by 0.25% on Thursday evening. 

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Sterling rides the currency markets rollercoaster

The good start for Sterling soon lost momentum following the Bank of England's inflation report and Mervyn King's press conference. 

The markets and sterling were initially boosted following a report in Le Monde newspaper of a Germany led aid plan for Greece. The ECB did not comment on these reports but the rumour alone was enough to drive the markets higher with the USD shedding some of its recent gains along with the Yen- GBP/USD pushed through 1.5750 and GBP/EUR 1.1425. 

However the markets made a quick U-turn as party pooper Mervyn King dampened the mood with a dose of reality- the key blow was the affirmation that it is far too early to conclude that no more QE needed.

This forced GBP/USD back to 1.5650 and GBP/EUR to 1.1350. Expect the "will they or wont they" that is the ECB assisting Greece to dominate the markets over the coming sessions.

In economic data from the UK earlier December Industrial production output came in stronger than expected at +0.5%. Good news for the UK economy but not significant enough to lift sterling. 

Sterling is suffering at the moment as it is being sold on the fear factor. Later today we have Bernanke’s testimony to the congressional committee- this could lead to some US dollar volatility.

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Political concerns weigh Sterling down

The Pound has lost ground today as political concerns and the prospect of the Bank of England’s policy meeting later in the week weighed down Sterling.
 

Two UK opinion polls over the weekend showed a general election, which has to held by June, would result in a hung parliament.

This weighed on sterling since many believe that such a result would lessen the likelihood of the UK getting to grips with its rising budget deficit.

Meanwhile, traders were wary ahead of the result of the Bank of England’s monetary policy committee meeting on Thursday.

By midday in New York, the pound fell 0.9 per cent to £0.8740 against the euro, lost 0.1 per cent to Y144.21 against the yen and fell 0.6 per cent to $1.5902 against the dollar.

Meanwhile, the dollar hit a six-month high on a trade-weighted basis, consolidating sharp gains after US growth figures came in stronger than expected last week. 

The figures helped give the dollar an additional boost given that the US currency was already benefiting from increased risk aversion.

Safe haven demand for the dollar was boosted as fears over Greece’s fiscal position and concerns over continued Chinese monetary tightening weighed on risk appetite and global equity markets.

The dollar index, which tracks its progress against a basket of six leading currencies, rose to a high of 79.534, it highest level since July 30. The dollar also rose to a six-month peak of $1.3850 against the euro before paring some its gains to stand down 0.3 per cent at $1.3905 and climbed 0.5 per cent to Y90.77 against the yen.

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Which is the weaker- Yen or Sterling?

Both Sterling and the Yen are being seriously undermined by both political and economic concerns and are racing each other towards the edge of the precipice.

On the Japanese political front, the replacement of Fujii by Kan as Finance Minister was not greeted enthusiastically and as mentioned yesterday the Yen took a little dip in value. 

The major concern, was that the Japanese bond market might take flight and the ability of the Ministry of Finance to satisfy the country’s massive debt mountain could become compromised. 

Added to this, the first official comments from Kan were distinctly Yen negative with him saying he wants the Yen to weaken further (it fell immediately from 91.10 to 91.75) and then adding that many Japanese firms favour the $/Yen rate at 95.00 and that he must work with the Bank of Japan to bring the Yen to appropriate levels. 

Beat that lot, sterling …. Well it did try its best.

On the UK political front, the call from the 2 cabinet members for a secret ballot of Labour MPs to establish Gordon Brown’s position as leader of the party was viewed very negatively by the market on the assumption that a leadership battle this close to the election would be the final nail in the coffin for the Labour party but also, might be enough distraction for them to take their eye off the economy. 

Following on from this, there is a report in the Times this morning headed up, "Cash-strapped Treasury contemplates shining up gilts" which ponders the possibility that the Government might be forced to offer higher returns on its gilts in an attempt to maintain their investment appeal. 

This will obviously have the effect of further increasing the cost of servicing the country’s borrowings from the current forecast of £60 billion per year - and that is just the interest component.

Old Black Eyebrows is seeking to sell a record £225 billion tranche of debt this year at the same time as the Bank of England look to offload the bonds that it acquired via the Asset Purchase Scheme as part of the QE process and against the back-drop of investor concern over the UK’s status as a AAA rated sovereign. 

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US Greenback ends the year on a high

As we enter the last full trading day of the year, the Greenback has strengthened and trades below 1.59. 

Yesterday's US consumer confidence showed a figure of 52.90 against an expected 53.0, but still up on November's figure of 50.6. On the back of this data the dollar moved over 1.60 but shifted back towards 1.59 levels soon after as thin market trading continued.
 

German consumer price index figures released yesterday afternoon added support to the euro as we saw an increase to 0.8% from an expected 0.7%, up on last years 0.3% and euro/GB Pound fell below 1.11 where it is trading this morning.   

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UK GDP data revision disappoints

The financial markets remain very illiquid and so reasonably volatile. 

Equities had a strong day with oil perking up ahead of expected positive revisions to today’s GDP numbers from the US and the UK. 

In fact the UK GDP came in lower than forecast at -0.2%. This disappointed the markets and sterling fell against the major currencies and briefly dipped under the key 1.60 level against the USD.

The US figure should not be much different from the previous estimate of +2.8% leaving the afternoon session very subdued.

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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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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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Pound slides after QE expansion

The Pound dropped sharply on Thursday morning after the Bank of England extended its asset purchase scheme by more than expected after its policy meeting.

The Bank announced a £50bn extension to its programme to £175bn as it continued to use a policy started in March of quantitative easing to lift the UK economy out of recession.

”The Committee expects the announced programme to take another three months to complete. The scale of the programme will be kept under review,” the Bank said in a statement.

Ahead of the decision, forecasters were evenly split as to whether the Bank would announce that it planned to spend the remaining £25bn of the £150bn earmarked for its asset purchase programme or would remain on hold.

The more aggressive action sent sterling and gilt yields sharply lower.

Sterling , which on Wednesday hit a 10-month high of $1.7042 against the dollar, dropped 0.7 per cent to $1.6868, fell 0.5 per cent from a one-month high to £0.8529 against the euro and lost 0.2 per cent to Y160.86 against the yen.

The yield on 10-year gilts fell 14 basis points to 3.68 per cent, while the more interest rate sensitive 2-year gilt yield dropped 17 basis points to 1.1 per cent, not far from the low just above 1 per cent it hit in December.

The Bank also kept UK interest rates on hold at 0.5 per cent, but this was no surprise to investors.

Meanwhile, the euro held steady around multi-month highs against the dollar on Thursday as traders awaited the outcome of the European Central Bank’s policy meeting.

Like the Bank of England, the European Central Bank was widely expected to keep its main lending rate at 1 per cent after its policy meeting.

But analysts said the post-decision press conference with Jean-Claude Trichet, president, would be scrutinised for any signs that he had become more upbeat on the prospects for the region’s economy or any announcements over unconventional monetary policy measures.

Increased investor optimism over the prospects for global growth have boosted both the euro against the dollar this week, stemming haven demand for the US currency as traders abandoned the relative safety of the dollar in search of greater returns elsewhere.

On Wednesday, the euro hit a high of $1.4446 against the dollar, its best level since December.

Much of the optimism over global growth was provided by a string of above forecast surveys of activity in the manufacturing sector across the globe early in the week.

But analysts said some caution had been evident in the rally in riskier assets after the Institute for Supply Management’s survey of the US services sector came in below forecast and a survey of employment in the US private sector also undershot expectations on Wednesday.

The dollar also edged higher elsewhere, climbing 0.3 per cent to SFr1.0642 against the Swiss franc and rising 0.6 per cent to Y95.46 against the yen.

Elsewhere, the yen suffered as Asian equities posted strong gains, denting haven demand for the Japanese currency.

The yen fell 0.2 per cent to Y137.30 against the euro and lost 0.6 per cent to Y80.24 against the Australian dollar.

The New Zealand dollar was also hit after figures showed employment in the country dropped by more than expected in the second quarter.

New Zealand unemployment jumped to its highest level since mid-2000, sending the kiwi down 0.5 per cent to $0.6699 against the dollar.

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Sterling slides as pressure on Gordon ditherer Brown remains

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

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

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

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

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

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

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Labour's death throes rattle Sterling

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

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

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

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

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UK green shoots are trampled by Mervyn King

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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UK data weakest since 1968

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

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

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

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

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

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

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GB economy slows sharper than expected

UK economy slows sharper than expected as construction slumps

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

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

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

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

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

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

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

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

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UK unemployment jumps at fastest pace on record

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

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

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

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

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

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

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

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

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Royal Bank of Scotland announces record corporate loss

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

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

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

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

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

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

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

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

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


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Snows stops play in London

It's a very subdued start to the week with the Capital largely cut off by the this morning's huge snow dump.

Trading rooms are likely to be half staffed at best so expect a brief flurry of activity this morning followed by an early break for home.

We have seen Sterling come off this morning, largely it seems on Sunday's report from Moody's that they were going to cut Barclays' long term rating by 2 notches to Aa3.

Although this is only on line with the earlier move by Fitch, Far East traders took it as a reason to take profits on recent Sterling gains.

This morning we are to due to get the UK PMI survey which, following recent better than anticipated Eurozone flash PMI numbers and German IFO survey, is expected to show a modest rise for January.

From the US this afternoon we get the manufacturing ISM survey which is expected to come in around the same level as January's number.

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A dry old week of data

Today looks no different with just December Retail Sales and the 4th Qtr GDP figures, both from the UK.

Neither figure expected to be very awe inspiring but that in itself might be Sterling neutral / positive. Trouble is, that with the Dollar on a bit of a roll, momentum might take over and cable would be pushed lower.

The Dollar was given a bit of a boost yesterday by comments from US Treasury nominee Tim Geithner. Assuming that he is speaking for the new administration, his affirmation that a strong $ was in the national interest and his accusation that China was manipulating the Yuan exchange rate for its own benefit.

The 2 statements seem to be a bit contrary but the underlying tone is very clear. Further Dollar gains were tempered however after a bit of a hiccough on Wall Street followed weaker than expected data from the US.

Microsoft started the mover lower in share prices by reporting that their earnings had missed expectations and that they were laying off 5,000 workers, or slightly more than 5% of its total workforce, the company's first widespread cuts in its history.

The Dollar has resumed its march in European trading this morning.

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UK the center of attention

With The Minutes from January's MPC meeting, unemployment numbers and the PSNCR data ensuring that Sterling remained in focus for most of the day.

Indeed it wasn't until 3.00pm, when the witching hour for option expiry arrived, that we saw the market shift its attention away from the Pound.

Data from the UK was again on the weak side of awful. Unemployment was higher, nigh on touching, or just above, 2 million depending upon which basis you want to believe and predictions for future trends were confirmed as still heading the wrong way.

The PSNCR was predicted to be huge (largely due to the £20 billion required for the purchase of RBS shares being included) but the outcome was still £4 billion + higher than the worst estimates.

The debt balloon continues to inflate yet still the DMO maintain that raising the sort of sums required to finance UK plc via Gilts issuance presents no problem. We will see.

Overseas investors were not overly impressed with all this and Sterling had another torrid day falling to a 25-year low of 1.3620 at London's close.

From there however, the currency experienced a bit of a bounce, getting to a high of 1.4020 at the close of New York trading. This sudden appreciation appears to be profit taking following comments that suggested Sterling's current plight would be high up on the agenda at the next G7 Finance Minister's meeting in February.

It appears that the MPC cut rates by 0.5% not because they felt it was necessary or would do any good but because the Market was expecting it and the value of Sterling was too fragile not to appease the Market. Interesting.

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UK is really getting some bad press

And not only the Teenage Scribblers (remember them) but also from experts who have been around a long time and are deemed to know what they are talking about - for most of the time at least.

Today we have Jim Rogers, who was co-founder with George Soros of their Quantum Hedge Fund, advising investors to get rid of everything Sterling related (including currency) and invest elsewhere.

Now whether it was as a direct result or whether it was just coincidence who knows but cable went through yesterday continuously making 7 ½ year lows and its value against the Euro also dipped sharply.

Gilt futures hit a 1-month low and yields rose again as concern over the UK's ballooning debt continued to grow. Outlook for the UK is cloudy to say the least and it is very apparent that, by their recent actions, the labour Government would love to draw a line under the ongoing disaster that is the UK Banking system.

Sterling is suffering on the delay.

The MPC minutes release will be studied for confirmation that rates are still heading lower and imminently. this won't do Sterling any favours. Neither will the UK unemployment numbers or borrowing figures. Yesterday's UK CPI figures, although reporting a less sharp fall than expectations, will not cause any concern with policy makers.

Yesterday the Canadian Central Bank cut their interest rates by 50 basis points to a historic low of 1% (still a differential over US Dollar rates but diminishing). They added that the country was in recession and warned that the economy would shrink by 1.2% this year.

The CAD dipped on the news even though the cut had been expected following last week's trade data.

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Well the Good News is that there is no news.

Because of the Martin Luther King Day holiday yesterday, there was no US data out and Wall street was not open. Other than that we are struggling for positives.

The UK Government's bail-out plan for Banks - Part II, despite initially being greeted with optimism, soon adopted the role of the mill-stone, dragging equities and Sterling lower plus pushing Gilt yields up. This despite the feeling that the MPC will cut rates at their February meeting and/or the March one as well.

Expect yields on Gilts to drop through the 3% barrier soon and Sterling to slip further as the market realises that the UK economy is still slipping fast and the minutes to be released tomorrow from the MPC promise further rate cuts to come.

Other than Obama at 5.00pm GMT today the major influence should be the release of the German ZEW survey of economic sentiment and current conditions, neither figure expected to be particularly inspiring.

This might be a reason to take profits on recent Euro/Sterling gains.

We also have Mervyn King making a speech at a CBI event during which it will be anticipated that he make reference to recent events in the economy.

Again, there are no major data releases from the US

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Yields, or rather the lack of them

Yields are again the major contributor to the wise money debate this morning.

Yesterday we saw further weak economic data from the Eurozone prompting one ECB member, Constancio, to call for a pre-emptive rate cut from the Central Bank - possibly at the same time as the MPC decision tomorrow.

We also had a look at the minutes from the last FOMC meeting in which the Committee made it very clear that they intended to keep US interest rates ‘very low' for an extended period (very low meaning a Fed Funds target rate of zero - 25bp) but focused much more on the ongoing weak state of the economy coupled with the escalating budget deficit and its implications going forward.

Barack Obama underlined this concern when he warned that this year's budget deficit could break through a record $1,000bn – more than double last year's shortfall – and remain above that level "for years to come". This obviously implies that although official rates will stay close to zero, there will be a requirement to maintain some reasonable degree of return on Treasuries in order to provide an incentive to foreign investors to keep funding the US.

The current 10-year US Government Bond yields about 2.50% and this looks likely to be maintained. The BIG declines in yields are likely to be seen in the Eurozone, Canada and (of great concern to Alistair Darling) the UK.

Given the huge future funding requirement by the UK via gilt issuance, a sharp reduction in long term yields is exactly not what the Chancellor would look for. Indeed the Times this morning were talking of investors preferring the much more attractive returns on offer from Top Rated Corporate Bonds going forward.

And this yield scenario, wise money feels, will determine the immediate outlook for currencies in the exchange market with the US Dollar gaining, or at least holding on to recent gains, against the other major currencies.

Yesterday's Nationwide BS house price survey added to the UK economic gloom but failed to suppress a Sterling rally (admittedly on the back of Euro weakness) which saw highs of 1.1075 and 1.4970. These moves, in such a quick time, look as much overdone as was the descent seen in the latter part of 2008.

Expect a move back down and then consolidation over the rest of the week.

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ECB tweaks deposit rates to encourage more interbank lending.

The ECB cut the rate it pays to deposit overnight money and increased the rate it charges for emergency loans.

The concern from the ECB is that whilst they have slashed their base rate at the fastest pace in the ECB's 10 year history to 2.5% it may not be enough to stimulate the economy as long as banks are refusing to lend to each other.

Banks globally have little confidence in one another and consequently are hording cash and tending to deposit with the Central Banks.

From 21st January the ECB's deposit rate will drop to 100 basis points below the base rate and the marginal lending rate will be increased to 100 basis points above it. Euribor set yesterday at 3.13, the lowest level since July 2006 – but still 63 bp above the base rate; in the seven years to August 2007, before the credit crisis began, the gap averaged only 15bp.

Trichet said on 15th December that there is a limit to how far the central bank can pare rates whilst yesterday Charles Bean (a UK MPC member) signalled that the UK could see rates reach 0%.

This divergence in outlook is continuing to stoke the negative outlook for the sterling euro cross. No doubt Euro zone exporters are hurting as we look towards parity. GBPEUR is currently trading at 1.0617 levels having rallied slightly from the record low seen at 5.20pm yesterday of 1.0456.

Sterling was hammered again yesterday, it is currently trading arond 1.5030 level but looks set to test yesterday's low of 1.49. This decline in Sterling from a peak of 2.0335 on 13th March to the year low seen on 4th December of 1.4680 represents a drop of 27.8%. This is the steepest yearly decline since the height of the Great Depression in 1931 when the pound was forced off the gold standard.

France's manufacturing confidence fell to the lowest level in 15 years in December, adding to signs that Europe's third largest economy may move into a recession for the first time since 1993.

Elsewhere, the Bank of Japan cut its benchmark interest rate to 0.1% (from 0.3%) in an effort to boost the economy. JPY saw a 13 year high yesterday against USD of 87.14 and is currently trading at levels of 88.55.

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New lows for Sterling

Another day and more record lows for GBP/euro are€“ currently at all time lows.

This cross is trading in uncharted territory and is struggling to find support with many expecting to see parity before the year is out. However, UK retail sales just out at better than expected levels (0.3% versus -0.6%) should lend support to GBP over today's session.

UK Unemployment out yesterday would not have helped GBP as the headline figure rose to 1.07m for November; a jump of 75,700 from October. This is the largest rise since 1991 and does little to quell fears of continued redundancies in London in 2009.

Japanese yen has also been in the headlines hitting record highs of 87.15 last night. JPY is currently trading at 87.68 and may well test yesterday's high again.

Japan's Central Bank meet tomorrow and there is speculation that they may well cut rates close to zero in an effort to stimulate their economy. Falling global demand has hit Japan's economy hard as they have such a export focus. Japan's rate is currently 0.3%.

Economists are also speculating about the ECB cutting deposit rates as soon as today in an effort to stimulate interbank lending. Cutting deposit rates (from current 2% on overnight cash) would make holding cash with the ECB less attractive and hopefully free up capital for consumers and companies and help the interbank market.

Ever since Lehmans collapsed banks have been very cautious about lending to one another. The Euribor (the euro interbank offered rate) set yesterday at 3.16 which is 66 basis points above the ECB rate.

In commodity markets, yesterday Opec agreed to cut production by a record 2.2m barrels per day but the price of crude oil has continued to fall. Oil has fallen by more than $100 from a record of $147 in mid July to current levels of $43.21 (Brent Crude in London). Opec has cut production three times since September and Opec accounts for 40% of the World's oil production.

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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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Credit crunch weighs wise money down

but it is Sterling that continues to bear the brunt of investor's concerns.

The headline in the The Times this morning caused a quick skip in the heartbeat, "Banks under the cosh as £1 tumble towards Euro 1". Wise Money wondered what on earth had occurred overnight !!!

As it happened, the headline was very much €˜for effect rather than based on the actual. Sterling is indeed at an all-time low against the Euro but over the past few days has actually stabilised at these levels.

The outlook remains clouded with a big danger of a further ratchet lower but as more dire news emerges from Eurozone, the prospect for a lower cross will diminish. On that note, the magnitude of the declines in both French and German industrial output, reported earlier in the week, were staggering.

This doesn't bode well for tomorrow's industrial output report for the whole of the Eurozone where the estimate is for a decline of 3.7% year-on-year. Somewhere down the line, probably not now until the New Year, there will be a re-assessment of exchange values with, in my view, the Euro being downgraded against all the majors.

We are now in the €˜dead-zone data wise with nothing scheduled to come from the UK or Germany for the next 2 days and only the Ind Prod number from the EU. The US and Canada are slightly more exciting but the whole pre-Xmas lull appears to be well and truly upon us. We do have the UK CBI monthly industrial trends survey later this morning but there are no prizes for guessing the mood of that.

As if to pre-empt the figure, the BoE's Kate Barker, in the Scottish Herald paper, lays the situation out - bleak on the economic assessment, with any recovery in the UK unlikely to be evident until the 4th Quarter of 2009, with the likely pace of recovery, very hard to judge.

Elsewhere the big news overnight was the Korean central Bank cutting their official rate by a massive 100 basis points to a record low of 3%. This €˜super-investor in US Treasuries has now cut rates from 4.25% in early October in an unprecedented series of reductions and cites the need to tackle the persistent credit crunch and help the economy to cope with the global downturn.

This morning, the Swiss National Bank have also further reduced their rates by another 50 basis points, bringing their target band down to 0 - 1.00%.

In the US, The House of Representatives agreed to a $14 billion interim loan to GM and Chrysler to tide them over. The affirmation of the bail-out, however, still requires a positive vote following the Senate debate on the matter later today. If passed, this would just sees the two companies through to March 31st the deadline by which they must file restructure plans (and even then they are not safe).

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UK sales down again

In November, the BRC survey showed on Tuesday in a grim portent of the all important Christmas shopping season. Sales fell 2.6% y/y in November, the sharpest drop since the Easter influenced April 2005. Not a good sign.

This morning Wise Money was trying to be a bit positive following the rise in house buyer interest shown in yesterday's RICS survey. Admittedly, the actual number of sales slumped to a new 30-year low but at least the interest in property was on the increase.

This, added to the further sharp declines in inflationary pressures from easier Producer Input Prices (down 3.3% in November alone for a 12-month 7.5% rise) put the skids under Sterling - especially versus the Euro where we established a new all time low. Other than that, yesterday was a bit thin on data so we look to today's offerings for a bit of stimulus.

We have important statistics from Germany and the EU this morning as well as further housing and trade data from the UK. On top of that, there are several Central Bankers speaking on their various economies and the expectation that Canada will cut their interest rates at their meeting this afternoon.

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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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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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