WISE MONEY

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

The consensus was for a rate of 7%. These numbers don’t make such good reading and not the sort of background that the new US administration would like to have at the start of their term in office.

They will be hoping that the combination of zero interest rates, unconventional monetary easing and the massive $ 1 trillion fiscal stimulus will serve to turn the economy round. The rest of the world will have its fingers crossed as well.

This implies that data from the US this week will be largely ignored with anticipation of weak numbers rife but focus on the long weekend (ahead of the Martin Luther King Day holiday on Monday) and Obama’s inauguration next week.

The releases are important however, especially the combination of Retail Sales and Consumer Sentiment and also Industrial Production. The latter is becoming especially watched with opinion growing that the severity of the recession has caused it to collapse to such a degree that the level of inventories is dangerously low.

Therefore this indicator might be the first to show the signs of some sort of recovery. there are several Federal reserve members scheduled to speak this week, including the Chairman Ben Bernanke. Their brief appears to be to talk on economic outlook and so these after hours occurrences could hold centre 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.

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

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

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

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

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

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

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

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

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

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

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

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

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The Swedish authorities didn’t quite go as far as rescuing individual Banks, but has established a €˜financial stabilisation fund’ just in case.. This morning we have had confirmation that the German Cabinet have approved the conditions for their own Banking Rescue Package.

I suppose the BIG question now is, will the newly €˜over-capitalised Banks be more ready to put their over borrowed clients into liquidation spreading the turmoil from the Financial sector into the Commercial arena?

This week there are several potential market moving events on the calendar. First up, and possibly the most severe is tomorrow’s deadline for insurers of Lehman Brothers’ debt CDS contracts to pay up on billions of Dollars of policies.

The problem here is no-one is sure what the net settlement (after hedging) will be and who, ultimately holds the risk.

Estimates for the settlement range between $5 billion and $300 billion underlining the magnitude of the unknown.

Any large hits will emerge quite quickly with the danger being for the hedge funds and the resultant cash/margin calls. The minutes of the last €˜MPC Meeting’ which didn’t take place, will make for interesting reading on Wednesday.

With expectations of large cuts in interest rates over the next 12-months, confirmation that a much more relaxed monetary policy had been discussed will be sought. On the same tack, we are expecting to see interest rate reductions this week in Sweden, Australia and New Zealand.

Added to these factors we have some important economic data throughout the week from UK, Eurozone and US but with confirmation of recession looming large across the major economies, more data telling the same story will be largely ignored.

More relevant will be Bernanke’s testimony on Economic Stimulus Legislation to the House Budget Committee at 3.00pm this afternoon and the outcome of the OPEC emergency meeting on Friday.

On the Money Markets, period rates have continued to ease in line with official policy and expectations with Dollar rates exhibiting the largest decline. We are seeing LIBOR rates in Dollars, Sterling and Euro fixed lower on a daily basis and the magnitude of change should increase as anticipation of severely lower official rates grows.

This development could of course prove detrimental to the currencies with ‘further to go’ as regards to rate cuts, ie Sterling and Euro, both of which are likely to find the next 12-months very negative in terms of currency strength.

Stock markets and commodity prices are again likely to be the focus for traders in the early part of the week, so keep a wary eye on news that will have a direct impact on these 2 sectors. Sterling has started in buoyant fashion against Dollar and Euro but I don’t expect this to last given recent history and upcoming economic conditions.

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.

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

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

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

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

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

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

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.