Articles from July 2008



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.

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 Dollar brings some confidence back into the market

After the release of the Confederation of British industry retail data yesterday sterling immediately weakened against the USD.

The market had already anticipated the data to be lower for the month of July at -15% following on from -9% in the previous month. However the result of -36% had an immediate impact on sterling and caused it to fall.

It is clear that every part of the high street is feeling the crunch at present. Sterling also had another blow as the mortgage approvals data fell to 36,000 with the new home loans reaching a record low in June.

This bleak data concerning the UK housing market is not expected to improve in months to come. Sir James Crosby the former Chief Exec of HBOS suggested in the press this morning that the new liquidity scheme introduced in April allowing banks to exchange mortgages for treasury bills to raise funds should be broadened to include mortgages underwritten since 2007.

On a brighter note the Conference Board announced that US Consumer Confidence increased slightly in July. Analysts believe the increase relates to oil prices heading lower boasting the dollar and diverting from the record highs we have been experiencing of late.

The US Consumer Confidence had hit 16 year lows last month so this improvement is a comfort. However it must be mentioned that this figure of 51.9 is a far cry from a figure of 111.90 in July 2007. It is apparent that consumers still very much see the current economic conditions as unstable and the US S&P; home price index for May certainly would reinforce any doubts.

This index yesterday reported that US home process fell at a record pace in May. Out of the 20 metropolitan areas included in this survey all showed annual declines for a further month.

However the markets reaction to a further fall in the price of oil, currently at $121 per barrel, along with sale of debt from Merrill Lynch saw the dollar rally for most of the day. US stocks were up on the day and brought some much needed optimism to the market.

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 outlook for the markets remains unsettled

The Euro strengthened against the dollar yesterday despite poor economic data released in the eurozone.

As Wise Money posted yesterday the German Consumer confidence indicator published five year lows. Further gloom for Europe followed with Spain’s National Statistics Institute announcing yesterday that Spanish house sales for the month of May slumped.

Spain who have experienced a real estate boom over the past ten years are now reporting house sales down by 34% year on year in May coupled with plummeting house prices. This continuation of negative news in the eurozone limits the ECB’s scope to raise interest rates coupled with the inflationary pressures will most likely leave Euro interest rates fixed at 4% next month.

In the UK the Mortgage Approvals data will be released this morning, it is expected to highlight the downturn of the UK housing market and for a further month drop to new all time lows.

The Land Registry figures publicised yesterday reported that last month house prices in England and Wales fell by a further 1% marking the tenth consecutive monthly decline, with the London housing market the worst hit. This is evidence that the UK housing market is still in a downtrend. Sterling’s only benefit at the moment on the currency markets is down to its relative yield advantage.

There is no escaping the housing gloom as the International Monetary Fund warned they could not see an end to the US housing crisis. The IMF expects further losses for banks with two mortgage banks declared insolvent already this week.

This data had a knock on affect on the dollar which steadied yesterday despite experiencing dollar strength over the weekend. Merrill Lynch gave weight to the gloom by proclaiming further write downs of up to $5.7billion in Q3. US stock market also felt the impact by dropping more then 230points highlighting that the severity of the current economic environment is not looking to settle.

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.

Wise Money eyes the UK housing market

After extremely poor retail sales last week further data released from the Office for National Statistics highlights the strain on the UK economy at present.

It reported that economic growth between April and June had slipped to 0.2% down from 0.3% last quarter. This slowdown is no surprise to the market and further slowdown is expected for future months. In line with other surveys Hometracker highlighted that UK house prices fell by 1.2% in July, the biggest annual fall since Hometracker began its survey in 2001.

As the bad UK data continues to build up the markets expectation that the Bank of England will consider to raise interest rates looks extremely unlikely.

In Germany the consumer confidence out this morning highlighted the global concerns in regards to inflation with falling housing prices and rising food and energy prices.

The German consumer indictor predicts that due to low morale August will see a downturn to 2.1 from 3.6 for the month of July, with the index expected to be at its lowest level since 2003.

Over the weekend the US congress met to try and salvage the US financial system. A new bill was sanctioned yesterday with the Federal Housing Agency to secure $300billion for the ever growing suffering American home owners.

It is expected to impact over 400,000 homeowners and is forecast to have an immediate effect. This bill could not come at a more crucial time as the US equity markets were down on the week in particular with Fannie Mae and Freddie Mac down 14% and 10% respectively.

The price of oil is still the hot topic of the moment. Oil reported a seven week low last week with oil down to $123 per barrel.

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.

Wise Money sees up and downs like a yo-yo

Sterling’s rise following the split MPC vote on Wednesday was short lived as UK retail sales data for June released yesterday plummeted.

Sales fell in all but one sector, with clothes, shoes and household goods sales severely hit. The sharper-than-expected decline drove the pound lower as investors bet the Bank of England may have to cut interest rates to bolster the economy.

The Office for National Statistics said retail sales volumes fell 3.9% in June, the sharpest fall since records began in 1986, after an upwardly revised 3.6% increase in May.

Analysts were expecting a fall of just 2.5% and an annual gain of 4.4% but annual growth was just 2.2% compared to 7.9% last time. While the Bank of England has given little sign that lower borrowing costs are on the way, because inflation is running at its strongest rate in more than a decade, most economists think rates will need to fall eventually.

It was also bad news for the Euro zone with German business sentiment declining sharply. The Ifo business climate index fell to 97.5 from 101.2 in June, its lowest level since September 2005.

Also of concern to policy makers at the ECB will be the fact that both Manufacturing and Service sector PMI indexes also fell in June. Services PMI declined to 48.3 from 49.1 in May its lowest reading for 5 years while Manufacturing PMI dropped to 47.5 from 49.2 – readings under 50 indicate contraction.

It wasn’t any better stateside either. The US weekly jobless claims jumped by 34,000 to 406,000 from 372,000 the previous week and new home sales were down 2.6% in June to record their lowest level for 10 years.

With the crucial US Non Farm payroll numbers due out next Friday the jobless claims does not bode well. Wall Street closed 283 points lower on the back of the weak economic data and the record losses announced by Ford. The car giant’s second quarter loss amounted to US$9 billion as sales of trucks and larger vehicles plummeted.

US crude oil prices bounced a little from recent lows to close at $126.15 yesterday with Brent crude also closing up at $126.96.

The Aussie Dollar has come under further pressure following an announcement by the National Australia Bank that they have written off A$798m in credit market related losses thereby increasing speculation that the Reserve Bank will need to cut interest rates sometime soon.

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.

A three way split decision by the MPC gives sterling a boost

The Pound was pushed to a three week high verses the Euro following a three way split in voting by the MPC at their July policy meeting.

Tim Besley was the loan voice calling for interest rates to rise while David Blanchflower to no one’s surprise voted for a rate cut with the remaining 7 members opting to leave rates on hold.

The last time there was a three way split in the voting was way back in May 2006 when the base rate was 4.5% and CPI inflation was 1.8%. The vote didn’t come as a huge surprise this time because the market was expecting a hawkish outcome anyway given the level of inflation reported earlier in the month which was known at the MPC meeting.

However, it does illustrate the Bank’s dilemma in trying to balance a slowing economy and increasing inflation.

The BoE in the minutes acknowledged such weakness in the real economy, noting GDP may slow more than forecast, while reiterating its warning that consumer inflation pressures were likely to be higher than expected.

The account of the meeting was largely in line with the BoE’s recent stance on rates, and apart from Besley’s stand, the minutes did not appear to be more hawkish than in the previous month.

Oil prices fell again yesterday following a report that US stocks of gasoline increased more than expected pushing U.S. crude down by a further $1.78 to $126.64. Brent crude declined by $1.95 to $127.60.

Also helping the dollar was the approval by the House of Representatives of plans put forward by the US Treasury aimed at supporting the businesses of Fannie Mae and Freddie Mac who between them own or guarantee about half of the U.S.’s US$12 trillion mortgage market.

The Beige Book held no real surprises by reporting that the US economy continued to slow through June and July that consumer spending was sluggish or slowing, manufacturing was in decline in most regions, bank loan growth was restrained, and the residential real estate market remained weak across most of the country.

It also pointed to continuing inflationary pressures with many manufacturers planning price increases to combat higher input costs.

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 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.

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.

Sterling remains under pressure but manages to advance against a weaker Dollar

The Pound gained no rest bite yesterday as more bad news on the financial sector and property market deepened economic gloom.

Firstly there was HBOS who confirmed that shareholders subscribed for a mere 8.3% of shares in its rights issue, leaving the underwriters with almost £3.8 billion of stock.

Then we had property website Rightmove who reported its first ever annual fall in house prices since it began keeping records six years ago; prices fell 2% year on year to July.

Following comments from John Gieve and David Blanchflower highlighted in yesterday’s commentary dealers will be looking very closely at the minutes of July’s MPC meeting on due out on Wednesday to gauge whether any other members of the committee are moving towards easing monetary policy soon, which would further weigh on sterling.

A Reuter’s poll of economists predicts that the MPC will have voted 8-1 in favour of rates staying on hold.

The dollar initially gained from news that Bank of America reported stronger-than-expected quarterly earnings but sentiment remains cautious and the dollar fell back sharply as poor company earnings reports in after hours trading from American Express, Apple and Texas Instruments triggered fresh dollar selling.

Adding too the negativity surrounding the greenback was a report yesterday from the Conference Board that showed that the index of leading US indicators fell 0.1% in June. This was in line with expectations but of more concern to traders was May’s figure which was revised down to minus 0.2% from plus 0.1%.

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.

Sterling starts the week on the back foot

The Pound was in decline on Friday following a report in the FT that the UK Treasury is considering a change its fiscal rules that would allow the government to increase borrowing to mitigate the effects of the slow down in the economy.

Ironic or incompetence then that this story broke on the same day that official figures showed that the public sector net borrowing in the first quarter of the financial year reached a record £28.2 billion – almost £10 billion above what it was in the same period last year. Net debt now stands at 38.3% of GDP just short of the 40% limit currently set.

Also weighing on Sterling were comments from John Gieve, Deputy Governor of the Bank of England and MPC member who said the bank needed to balance the prospects of slowing growth and rising unemployment with rising inflation.

He also said he could not rule out a recession. Throwing in his tenpenneth this morning has been fellow MPC member and arch dove David Blanchflower. He was reported in the Guardian saying that the British economy is heading into recession and interest rates should be cut well below the current 5%.

Gains for the Dollar were limited on Friday by ongoing concerns over the financial sector. On Thursday Merrill Lynch reported weaker than expected second quarter results posting a loss of US$5 billion twice as much as analysts forecast and on Friday Citigroup announced a US$2.5 billion loss, albeit smaller than expected despite further write downs of US$11.7 billion.

Other banks due to report this week are Bank of America (today) and Wachovia Bank (Tuesday).

The Euro was also hamstrung by comments reported on Friday from ECB president Jean-Claude Trichet that euro zone growth will be week in the second and third quarter before staging a recovery. EUR/USD starts this week pretty much where it finished on Friday at 1.5860.

Starting with the minutes of the July MPC policy meeting due out on Wednesday all the key economic data is published in the second half of the week including UK retail sales and US existing home sales on Thursday and UK GDP and US new home sales on Friday but more on these as we progress through the week.

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.

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.

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.