WISE MONEY

A similar pattern has emerged in USD/JPY which has struggled to hold over 95. In the last four trading days we have seen a tight trading range for GBP/USD which is unusual in the light of the volatility in the last few months.

Today we have a few data snaps in the calendar for the UK which could shake the markets back into life. We have UK mortgage approvals, consumer credit, net lending and M4 money supply out this morning.

Yesterday the USD strengthened against the pound from over 1.65 back to 1.6350 and from 1.4280 down to 1.4108 against the euro. US stock markets fell more than 1% and this helped swing money back into the USD. US economic data supported the trend into risk aversion as consumer confidence fell from 49.3 to 46.6, the lowest level in 3 months.

The S&P;/Case-Shiller home price index fell 17.1% in May- this is the main measure of US house price movements. In addition US corporate earnings were shaky and Bank of America announced that they will be shutting 10% of branches signaling further lay offs.

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The Bank estimated that between 7 and 11 per cent of homeowners with a mortgage owed more to their lender than their property was worth, the equivalent of 700,000 to 1.1 million householders.

Negative equity may have amplified the speed and scale of the recession, the Bank said in its Quarterly Bulletin.

“Large losses on mortgage loans and associated securities can erode banks’ capital positions, affecting both lenders’ willingness and ability to lend and, in extreme cases, their solvency.”

Around 200,000 buy-to-let investors were also estimated to owe more on their mortgage than their property was worth, in a sector particularly battered by the economic downturn.

The research said that the overall number of those in negative equity during the first quarter of 2009 was comparable with those who suffered the problem in the mid-1990s, during the last housing market correction.

The Bank said house prices had fallen by around 20 per cent between the autumn of 2007 and the spring of 2009, the largest nominal fall in property values on record. In contrast, it took six years for house prices to fall by 15 per cent between 1989 and 1995.

But despite the steep drop, the Bank’s research suggested that between 73 per cent and 78 per cent of households who were in negative equity faced a shortfall of less than £15,000, and between 56 per cent and 65 per cent had one of less than £10,000.

The bulletin said that the UK’s biggest banks lent five times the value of their shareholder’s capital in home loans. In turn, 40 per cent of mortgage debt was packaged up and sold to raise more loans, increasing the risk of losses, the Bank said.

There are no figures which accurately measure the number of people who are in negative equity, so the Bank based its estimates on three studies. A survey of mortgage holders, data from the Financial Services Authority, and the lenders’ own data.

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Bob Pannell, head of research at the CML, said negative equity had “resurfaced” as house prices have fallen and that it “will contribute to subdued property turnover”.

However, the CML said the majority of those in negative equity around two thirds face only modest shortfalls of less than 10 per cent, equating to around £6,000 for those first-time buyers with negative equity, and £8,000 for other home-buyers.

The CML’s estimate is less than some economists’ predictions that nearly four million home owners are already suffering from the predicament. And it is still less than the 1.5 million households estimated to have negative equity at the depth of the last housing market slump in 1993.

It said: “Falling house prices have once again raised the prospect of negative equity for borrowers. Although negative equity may reduce a household’s coping strategies should they encounter payment difficulties, it does not of itself affect the ability to keep up mortgage payments or create a risk of repossession.”

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The Dollar dropped sharply in the Far East on heavy short covering in Euro/Dollar helped by rumours of strong buying from an Asian Central Bank.

The rate rose from 1.3170 to get to 1.3390 before settling at 1.3365 and dragged the other majors with it. Cable moved from 1.4665 to reach 1.4870 before easing.

Sterling however, has tracked higher again following a UK bullish article that appeared in the Telegraph in which the Lombard economist predicts that the UK Housing crisis will end by Christmas.

This will make today’s release of the March RICS housing market survey even more eagerly awaited with expectations of a slightly firmer figure from February’s -78.3% (the lowest figure in more than 30-years).

Survey data suggests that growth in enquiries and viewings have become more buoyant resulting in a modest uptick in sales although financing constraints combined with fears of unemployment continue to hold back any significant recovery in activity.

Sterling however has started this morning’s session on the front foot hitting a 5-week high against the Euro of 1.1198 Other UK data is sparse for the following 3 days with most figures of significance deferred until next week owing to the Easter holiday.

This leaves forex players again watching equity news for direction and we have already seen European markets open firmer with the early release of very strong Quarter 1 figures from Goldman’s.

The Dollar ought to recover some of its recent lost ground especially given North Korea’s comments that they are considering building their own light-water nuclear plant. This could very well weaken the Yen and send the cross back up through 100

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Average house prices in February slid to £160,327, down from £194,953 in the same month a year ago. This takes average prices back to levels last seen in August 2004 and 20pc lower than the peak in late 2007.

One of the biggest problems for the housing market has been the inability among potential buyers to secure mortgages, with banks remaining risk averse and unwilling to lend. The number of first time buyers is now at the lowest level in 35 years.

While the latest mortgage approvals data suggest that activity may have bottomed out, and the Royal Institution of Chartered Surveyors has reported an increase in people making enquiries about buying a house, economists said house prices had further to fall.

“We are sceptical that sales will pick up substantially any time soon and put a floor under prices. Mortgage activity is still extremely low compared to long term norms, while many people are likely to be looking at houses pretty casually and will probably be very cautious about committing to buying a house in the current economic environment.”

In the early 1990s, it took slightly more than 8.5 years for house prices to regain their late 1989 peak. With an even sharper slide this time, and probably a persistent problem of credit availability, it may take even longer to regain the recent peak this time.

Citigroup estimates that about 1.2m homeowners are now in negative equity, where the mortgage is more than the value of the house.

The Bank of England is expected to cut interest rates by half a percentage point to 0.5pc when it announces its monthly decision at midday, which will help some homeowners but further erode savings accounts.

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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.

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.

Britain’s public sector net debt is already a record high, hitting 47.8 per cent of GDP in January, official figures show. This is the highest level of debt recorded since the ONS started recording data in 1993.

The ONS said that it had decided to add the banks to the labour Government’s books because “the Government has the ability to control the respective banks’ general corporate policy through the conditions associated with the agreements signed relating to recapitalisation.”

Howard Archer, of IHS Global Insight, the economic consultancy, said: “Given the rate at which the UK public finances are deteriorating and new measures are having to be introduced to try to support the financial sector and the economy, it is frankly anyone’s guess as to how high the public deficits may go over the next couple of years.”

The massive debt will cause problems for the labour Government, which has already seen Northern Rock’s debts added to its accounts. Analysts said that it would probably have to revise up its borrowing forecasts in April’s budget.

Andrew Goodwin, Senior Economic Adviser to the Ernst & Young ITEM Club, said: “We expect the Chancellor to be forced to make significant upward revisions to his borrowing projections when he presents the Budget.”

The public sector showed a surplus on current budget of £8.4 billion in January 2009, compared with a surplus of £15.3 billion in January 2008.

Between April 2008 and January 2009, the public sector recorded a deficit of £42.5 billion. At the same stage of the 2007-08 financial year, a deficit of £7.0 billion had been recorded.

Mr Archer said: “The public finances for January are terrible, coming in even worse than feared. January always sees a surplus on the public finances at is a bumper month for tax receipts.

“Unfortunately though, bumper hardly describes the tax receipts for this January as they have been decimated by sharply contracting economic activity, declining profitability, rising unemployment, reduced bonus payments, December’s VAT cut and substantially weakened housing market activity and prices.

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If this is correct then expect to see an announcement as part of the G20 Heads of State communique at the close of this weekend’s summit in Washington and lower interest rates all round come next week.

Not sure if the gradual acceptance of this possible development was the sole reason for the massive turn round in Wall Street’s fortunes last night but the bounce in US share prices was massive (DJIA up 6.67% and NASDAQ up 6.5%) and a positive impact on other stock markets has been/is being seen.

As I mentioned before, the problem is that monetary policy tinkering (albeit with a capital T) will not work on its own.

In order for the stagnant global economies to benefit from lower rates, we need to see adjustments to fiscal policy plus a return of confidence to the Financial Markets and here is where the problem lies.

The big player at the table is the US of course, who are presently in a complete fiscal mess. While Congress are keen to pass through a large fiscal stimulus package, there is considerable doubt as to whether George Bush will sign it.

The second biggest player is the Eurozone who have no mechanism for the harmonisation fiscal policy and it is obvious to all that there is considerable discord amongst members as to the desirability of any immediate stimulus.

Japan, the third largest in the group, has no scope for any sizeable fiscal adjustment as its debt ratio is far too large for it to be able to push anything meaningful through. In other words it looks very unlikely that any sort of agreement on fiscal stimulus will be reached this weekend and as such, the kick-start will sputter along for a while yet.

It is interesting that the focus of Paulson’s bail-out plan for the US banking system has shifted dramatically with concern centred suddenly on consumer demand rather than the Banks’ huge portfolios of toxic assets and the fund being used to invest in Financial Institutions rather than just buying toxic assets from them.

This, I suppose, is about as close as we are going to get to a cash injection into the US economy as we are going to get ahead of the change in the US administration in January.

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.