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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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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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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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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The euro is in the spotlight

The Pound held up well yesterday as the latest inflation data confirmed that CPI fell 0.7% in January bringing the annualized level to 3.0% which is down slightly from Decembers 3.1%.

The 3.0% level is still well above the Bank Of England’s 2% target for inflation and this data suggests that interest rates may not need to be cut in March as previously thought.

However inflation will remain a concern for the Bank Of England- Mervyn King has already signaled that inflation could fall sharply this year and todays BOE minutes will give us more insight to the sentiment of the MPC.

The euro was the big loser in the currency markets yesterday falling to 2 month lows against the dollar and also retreating against the pound…real concern is now prevalent on the health of eastern European banks.

With the threat of a downgrade in credit looming over eastern European subsidiaries of Swedish and Austrian banks coupled with the expectation of more banking losses in Europe forcing the euro lower.

The EUR/USD moved to a low of 1.2548 and 1.25 is now the key target before a break to 1.2312…GBP/EUR failed to hold above a move back to 1.13 yesterday, however this will again become the target as the spotlight remains on the euro and its woes.

Overnight the final approval was placed on the US stimulus package of $787bn which is desperately hoped will kick start the global economy. The urgency of Obama to introduce this stimulus was justified as General Motors and Chrysler have requested another $21.6bn on top of the $17.4bn already received.

This caused a sharp sell off in equities- in particular the Dow as risk aversion kicked in.

One to watch in the markets at the moment is USD/CAD which has broken a key resistance level of 1.26…with risk aversion and the falling value of Oil we could see this pair re-test the 1.30 level in the near term.

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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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Another volatile week beckons

Sterling fell sharply on Friday, hitting a new record low against the euro and a six year low against the dollar as intensifying risk aversion and concerns about a weak UK economy weighed heavily on the pound.

The euro rose 3% to 81.95 pence, while the pound traded as low as 1.5270 its lowest level against the dollar since 2002. Figures out Friday showed the UK economy contracted by 0.5% in the third quarter compared with the previous three months, much worst than forecast.

Technically not a recession yet as second quarter growth was flat, however, both Prime Minster Brown and Bank of England Governor King have suggested that the UK is already in recession and therefore we should expect further negative growth in the fourth quarter.

The yen extended gains against the dollar and euro on Friday. The dollar fell to a 13-year low of 90.95 yen while the euro fell more than 10% to a low of 113.82 yen.

However, the Japanese currency fell back just before New York markets opened on speculation the Bank of Japan may have intervened to curb the yen's rise. While intervention would not trigger a change in trend it could contribute to a stablisation of the market and would be consistent with the G7's position of only intervening in disorderly markets.

Oil prices continued to ease despite a decision taken by OPEC at an emergency meeting on Friday to cut production by 1.5m barrels per day. West Texas crude traded as low as $62.85 on Friday, down 3.7% on the day and a whopping 57% decline compared to its peak of $147.27 back in July.

Gold was also trading lower at $680 losing nearly 6% of its value on Friday and 31% down from its peak of $987 in July.

The focus this week will be on interest rates.

There are strong expectations that US rates will be cut by at least 50 basis points when the Federal Reserve announce their rate decision on Wednesday.

Both the Bank of England and the European Central Bank are also likely to cut rates at their policy meetings scheduled for next week although it would not be a total surprise if they reduced rates early in a coordinated move with the Fed.

Credit pressures on the emerging market economies continue to increase with the IMF agreeing over the weekend to provide Ukraine with USD16bn of loans with talks between the IMF and Hungary in an advanced stage.

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.

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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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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Debate escalates on Fed bailout plan

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

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

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

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

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

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

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

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

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

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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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Currency converter uncertainty

Curency markets after having time to digest the US Treasuries decision to rescue the Government Sponsored Enterprises (GSE'S) reversed gains from earlier in the week on concerns the announcement failed to solve the fundamental concerns of the US economy, notably the slumping housing market and associated credit losses for banks.

Equities slumped while government bonds rallied as risk aversion returned to the markets. Oil also continued to edge towards $100 a barrel and the dollar retreated from earlier highs against the Euro and GBP.

Yesterdays data showed a sharper than expected decline in US pending homes sales for July, declining 3.2% vs. expectations of a 1.4% drop. The data is volatile and tracks sales before the GSE announcement (and consequent decline in mortgage rates) but underline the sensitivity of investor sentiment globally to the state of the housing markets.

In news closer to home, the National Institute for Economic and Social Research stated that the UK was contracting for the fist time in a decade as GDP declined 0.2% between June and August. Falling house prices and the global credit squeeze were familiar woes accredited to the gloomy outlook.

In the UK we saw data releases yesterday, showing the housing market continues to show signs of deterioration. The RICS house price balance came in slightly better than expected at -81% (predicted -84%) but from the data the details warned that sales had fallen to a record low due to the unavailability of mortgages.

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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.

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.

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.

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.

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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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.

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One step forward, two steps back

The various Markets started down the road that is the second half of the year with some optimism but got hit by another almighty truck speeding towards them. Equity. Bond, Commodity and Currency Markets all spent the day on the defensive amid widespread wailing and wringing of hands.

Stock Markets are having a torrid time with both the FTSE and Dow just a smidge away from entering respective official bear markets, indicated by a fall of 20% from the previous peak (FTSE is currently down 18.5%).

The NIKKEI last night closed after its 10th consecutive day of losses, the longest sequence since 1965 having lost about 8% of its value during this period. This morning sees UK stocks already under pressure with both Construction and Retail sectors under pressure – M&S pontificating that retail conditions will remain grim for the next 2-years.

Dissonance reigns in Europe over the ECB decision on interest rates scheduled for Thursday lunchtime. The Central Bank have manoeuvred themselves into a corner over the decision on raising rates having already primed the Markets for such a move.

Politicians however can see the writing on the wall and have been voluble in their questioning the wisdom of such a move. With economic data from Eurozone very much on a down, the hiking of rates is unlikely to go down well across the region.

In the UK, data was also negative with the PMI lower than expected (45.8 ag exp 49.8) to a 7-year low, house prices fell for the 8th straight month declining at their sharpest rate since December 1992 – according to the Nationwide Building Society and Sterling accordingly dipped down to 1.26 against the Euro.

The only currency that fared worse than the pound was the US Dollar which suffered at the hands of a continued rise in crude oil prices (Israeli sabre-rattling towards Iran in response to the latter's nuclear programme) and the decline in the Global economy.

Cable briefly hit 2.00, but very briefly. By the time you had said "€˜I will have some Dollars there please' it was heading lower.

The quandary for market participants is for everything that you sell, you need something to buy.

On that basis the high yield commodity based currencies might have some latent strength in them and I particularly like the prospects for the Norwegian Krone with oil reserves, independence and relatively high interest rates. We will see.

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OPEC to boost Oil output but little impact on prices

A summit held in Jeddah over the weekend which included representatives from all the major oil producing and consuming nations resulted in somewhat of a stalemate, as few of those on the supply side agreed that action was required by producers in order to curb the rising cost of oil.

Although blaming speculators for record prices, Saudi Arabia as head of OPEC has though agreed to increase production by 200,000 barrels per day by the end of July.

Saudi King Abdullah bin Abdul-Aziz stated that he was concerned about the global economic instability caused by higher prices and reaffirmed that, "€œWe declare our readiness to meet any additional needs."

Doubts that the summit will have any significant short-term impact on prices due to the continuing attacks on infrastructure in Nigeria and growing tensions between oil companies and the Kremlin were confirmed this morning as crude remained above $136.

The weekend has also emphasised the widening rift amongst OPEC's members over how the cartel should react to the demands of consuming nations to increase supply.

Several members including Algeria and Qatar have argued against increasing supply because speculators will drive up the price of oil whatever the production levels, whilst only Kuwait has publicly declared it is willing to follow Saudi Arabia's route if required.

Gordon Brown announced during his speech to the summit that Britain's energy industry would be opened up to encourage investment from oil producing nations in order to advance alternative energy sources.

Last Friday's EU meeting in Brussels also witnessed disagreement amongst leaders on a number of issues including the Irish rejection of the Lisbon Treaty and the possible future enlargement of the bloc.

President Sarkozy expressed his belief that the EU could not be expanded to include countries such as Croatia without the treaty being in place. This view was supported by a number of leaders including Angela Merkel, however others such as Silvio Berlusconi argued that enlargement should take place sooner rather than later.

In the markets, Friday capped a miserable week for the FTSE 100 as it ended the week down 88 points at 5620. On Wall Street the Dow fared little better slipping 1.9% by close of trading on the back of growing concerns over possible further downgrades in the financial sector.

In the currency markets Sterling fell against the euro as traders became less confident in a UK rate change and ended the week down 2% at 1.26. Preceding this week's Fed announcement on interest rates the dollar posted its biggest weekly decrease (3%) against the euro as EURUSD finished at 1.56, whilst cable closed at 1.97.

There are a number of important reports due for release this week including today's German IFO business survey, which will be closely scrutinised after last week's ZEW index reported that investor confidence had fallen to its lowest level for almost 16 years.

Tuesday will see the release of data in the US on consumer confidence before Wednesday's Fed announcement on interest rates. The market is predicting that rates will be kept on hold at 2% on the back of gloomy data still emanating from the housing market.

In relation to the UK, the CBI's Distributive Trades Survey will be released on Wednesday and will be significant as it is acknowledged that both the BOE and UK government place greater weight on the report as an indicator of short-term trends in the retail sector than last week's consumer index.

The week ends with the release by the Office of National Statistics of the finalised UK GDP figures for the first quarter of 2008

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Oil reaches another record high day before CPI released

Inflation in the Eurozone during May was 3.7% according to figures released by the EU's official statistical office yesterday, up from 3.3% in April.

These levels of inflation have not been witnessed since the Eurozone was created in January 1999 and will add weight to the calls for a rate increase by the ECB as early as next month.

Soaring commodity prices combined with mounting wage pressures are creating a situation in which it looks increasingly likely that the ECB will place the combating of inflation above the need to maintain economic growth.

Despite an announcement by Saudi Arabia that it plans to boost oil production to its highest level in 25 years, oil prices jumped on Monday to a fresh record high of $140 a barrel whilst the dollar fell against sterling and the euro.

EURUSD was driven up through 1.54 and then 1.55 overnight with cable also pushed higher but was unable to beat the 1.97 upside barrier.

This continued rise in the price of oil was clearly one of the main topics of discussion at last weekend's G8 summit.

Despite the split between the finance ministers as to the cause of the record prices, all were in agreement that the inflationary effect of rising commodity prices were making the job of policy makers a lot more complicated.

Hank Paulson, the US Treasury secretary attempted to again talk up the dollar and argued that the high oil price, "€œbrings the risk that the slowdown in our economy is going to be prolonged." As mentioned yesterday, the markets are predicting an increase of 75 basis points in rates by year end, however the Fed yesterday warned that although there is a good chance rates will be increased, the markets may have got carried away as to how many hikes there will be.

Inflation will remain at the top of the agenda today with the release at 9:30am of the CPI index in the UK. If market expectations for a 3.2% y-o-y rise are correct, this will require an open letter from Mervyn King explaining why inflation has risen above 3%.

The pressure is very much on the BOE to prove it can still maintain some level of control over inflation despite what is happening in the commodity markets. The sentiment in the market is that we are reaching a point where the BOE must decide whether to sacrifice economic growth in order to prevent inflation becoming a runaway train.

However with the UK economy predicted to grow just 1.3% next year, King's words will be closely scrutinised by both the market and consumers.

Equities in both London and New York were down on Monday as the further surge in oil prices dented confidence. The FTSE ended the day down 0.14% on the first day of trading following the Chancellor's announcement that new rules were needed to ensure the ‘short selling' of shares was properly regulated.

Wall Street stocks dipped into the red as oil dependent companies and airline stocks took a hit dragging the Dow Jones down 0.3%.

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Inflation Remains Top of Central Banks Agenda.

On Friday morning it was announced that inflation in Germany has accelerated more than initially reported back in May, caused mainly by the price of oil.

The Federal Statistics Office reported that consumer prices increased by 3.1% year-on-year, a 10 basis point increase from an estimate made on May 28th. This could offer further support for the ECB to raise rates sooner rather than later. Later on Friday afternoon the trend of higher inflation continued over in the US.

It was reported that the consumer price index had increased by 0.6% during May, which is the biggest monthly increase since November.

Prices climbed 4.2% in May year-on-year, leading many investors to believe that the Fed will start to raise rates as soon as August. The markets have now priced a total increase of 75 basis points by year end.

Both the ECB and BOE are clearly focused on controlling inflation caused by higher commodity prices. In a somewhat unusual move the bank released the transcript of a speech made by the Executive Director Paul Tucker back on April 28th in which he indicated that policy makers must weigh up the significant inflationary risks from the commodity-price shock against the need to ‘mop-up' after the credit crisis.

In relation to rate expectations in the Euro zone, ECB board member Jose Gonzalez-Paramo added an element of doubt by commenting that, "€œThere is a possibility, not certainty, of a rate increase at our next meeting."

The announcement late last Friday afternoon that 53.4% of voters had voted against the Lisbon treaty will have significant ramifications throughout Europe.

At a two-day summit starting in Brussels this coming Thursday the EU's leaders will seek to outline a plan aimed at averting a full-on crisis, but many including the Irish PM have expressed a belief that on this occasion there is no quick fix.

The Irish vote against the Lisbon treat and slightly less hawkish comments from Gonzalez were the main forces behind the Euro's move lower on Friday. The single currency continued to weaken against the dollar as it traded down to test the 1.53 level but was unable to break below.

This also dragged GBPUSD down to briefly threaten 1.94. The weaker Euro allowed sterling to push back with EURGBP trading through 0.79.

Tuesday will see the release of the UK's Consumer Price Index. If market expectations for a 3.2% y-o-y rise are correct, this will require an open letter from Mervyn King explaining why inflation has risen above 3%.

The minutes from the Bank's meeting earlier this month will be released on Wednesday at 9:30 am. These will be closely scrutinised by market participants for in indication as to the future path of UK interest rates.

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ECB comments dampen the euro

This morning the Euro has weakened against the dollar on the back of ECB comments yesterday that multiple interest rate hikes are unlikely.

In addition, InBev of Belgium's pending acquisition of Anheuser-Busch for $47bn may lend additional support for the dollar as the market anticipates InBev's USD requirement.

In the US, the Fed's beige book survey of data and information reaffirmed the weakening economic conditions stemming from softness in consumer spending, higher food and energy prices.

Corn prices have been on a run, continuing yesterday and giving support for other agricultural commodities. Oil prices continue to rise, moving up more than $5 a barrel yesterday. Globally, stock markets closed lower with the FTSE 100 index falling for its fourth consecutive day of losses.

As the market reassesses the interest rate structure for the euro, sterling has gained a bit of ground. In the UK however, economic data is dire with an increase in unemployment and the trade deficit and average earnings down fueling opinion that recession in the UK is very real possibility.

Economic data to watch for today is US retail sales figures out at 1.30pm and this afternoon Bernanke is speaking again. Tomorrow the G8 finance ministers are meeting in Osaka to reportedly discuss the rise of oil and food prices impact on the global economy.

Last of the most important announcements are the inflation numbers from the US on Friday afternoon. High readings will further support expectations for interest rate hikes from the Fed going forward.

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.