WISE MONEY

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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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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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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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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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.

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 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.

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 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.

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.

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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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.

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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.

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.