Articles from October 2008



Figures confirm US heading towards recession

Preliminary GDP data released yesterday showed that the US economy contracted 0.3% in the third quarter, its sharpest decline in seven years, as businesses and consumers reigned in spending as fears of a recession took hold.

The market consensus was for a decline of 0.5% so although the 0.3% contraction was the steepest decline since Q3 2001 it was not as bad as expected.

Continuing job losses coupled with declining gains from stocks and other investments have put consumers under severe stress. The GDP report showed that disposable personal income dropped 8.7% in the third quarter after rising 11.9% in the second quarter boosted by the US government’s economic stimulus payments.

US Initial jobless claims for the week ending 25 October was left unchanged at 479k, above market expectations for a decrease to 475k. This compares to the revised 479k reading seen in the prior week (prev. 478k)

The Bank of Japan cut its interest rate by 20 basis points to 0.30%, less than the 25 basis point cut widely expected. The yen strengthened however on renewed investor concerns over riskier assets.

Asian equity markets returned to negative territory after a week of gains reflecting the gloomy outlook that persists despite interest cuts.

This morning a report showed that German retail sales fell 3.1% in September after a rise of 3.3% in August, some turn around and underpins expectations that the ECB will cut interest rates next week.

Gold slipped $3.75 per ounce to $731.75 and is on course for its biggest monthly decline since 1983, as oil also fell on recession fears forcing investors to cash in to stem losses.

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.

FED delivers an interest rate cut to 1%

No surprises as the Fed cut interest rates by 50 basis points to 1%.

They were joined yesterday by the Chinese and Norwegian central banks who cut rates by 27 and 50 basis points to 6.66% and 4.75% respectively.

It looks as if the Bank of England and the European Central Bank will keep us waiting for their interest rate decisions until next week.

On the foreign exchanges both the yen and dollar weakened further as risk aversion continued to ease, stock markets posted strong gains and expectations for further interest rate cuts grew ever stronger.

UK mortgage approvals rose in September for the first time in more than a year, after hitting a record low in August. Mortgage lending last month was more than twice market forecasts but that followed a downward revision to August which showed the first net repayment since the series began in 1993.

The BoE said mortgage approvals rose to 33,000 last month from a record low of 32,000 in August, the first rise since June 2007.

While the figure was marginally higher than expected, approvals are running at a third of their level a year ago, suggesting continued downward pressure on house prices. Net mortgage lending rose by £2.167 billion in September, more than twice analysts’ forecasts, but the BoE revised down its August figure to show a fall of £691 million.

Consumer credit rose by just £251 million in September, the weakest rise since February 1994 and supporting anecdotal and survey evidence that consumer spending is weakening.

The Nationwide Building Society released its latest house price survey this morning that showed house prices fell 1.4% in October compared to a revised drop of 1.5% in September.

The annual rate of decline was 14.6% the biggest annual fall since comparable records began in 1991. On the upside September’s fall was smaller than the declines reported in each of the previous three months.

In the US yesterday a report showed that US Durable goods rose unexpectedly in September by 0.8%, led by surging demand for defense goods and transportation equipment.

The jump in orders for durable goods – items intended to last three years or more – followed a revised 5.5% drop in August. Dealers were expecting a 1.2% decline.

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 much better day for equity markets all round as bargain hunters take stock

The dollar and the yen both fell back as shares made strong gains across all exchanges as equity traders chased bargains and currency dealers decided to take profits.

The yen plummeted against the dollar following reports that the Bank of Japan is considering a 25 basis point cut in interest rates in order to underpin the economy. Also weighing heavily on the dollar were reports that consumer confidence and house prices in the US fell sharply.

The yen suffered its sharpest one day fall against the dollar since 1974.

The dollar gained 5.3% to trade at 97.75 with the euro improving 7.3% to 124.36 yen. Sterling gained also benefitted despite expectations of lower interest on the back of a relatively positive CBI report.

Prices of US single-family homes plunged a record 16.6% in August with U.S. consumer confidence recording a record low in October as a worsening financial crisis made Americans anxious about their jobs and pessimistic about the future.

The Conference Board said its index measuring consumer sentiment tumbled to 38.0 in October from an upwardly revised 61.4 in September. That was the lowest reading since the index began in 1967. The previous low was 43.2 in December 1974.

Sterling held up well against the weaker dollar and the euro as UK retail sales fell less than expected in October.

The Confederation of British Industry’s distributive trades survey balance stayed unchanged at -27 in October. Analysts had predicted deterioration to -35. The balance had fallen to -46 in August, its lowest reading since the series began in 1983.

All eyes today will be on the US Federal Reserve as markets await the FOMC rate decision due to be announced at 18:15 GMT with most analysts forecasting a 50 basis point reduction.

The probability of a coordinated rate cut today involving the Fed, the Bank of England and the European Central Bank is looking less likely.

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.

Risk aversion prevails with less volatility

Safe haven flows driven by risk aversion again boosted the dollar and yen yesterday but market activity was less volatile than that seen last Friday.

The yen traded as low as 91.93 verses the dollar but remained above the 13 year low seen on Friday (90.95) and rose to 113.61 verses the euro its highest level since May 2002. The dollar set a fresh 2½ year high verses the euro at 1.2332.

Finance officials from the G7 earlier issued a statement saying they were concerned about the excessive volatility of the Japanese currency and said they would continue to monitor markets closely and cooperate as appropriate, raising prospects for a coordinated intervention.

Equity markets also enjoyed some rest bite from the recent turmoil. The FTSE closed just 30 points lower on the day having traded down 218 points at one point.

The Dow closed down 2.4% recovering some lost ground suffered during the day. Overnight in the Far East both the NIKKEI (up 6.4%) and the HANG SENG (up 14.3%) posted strong gains that hopefully will inspire and encourage traders in European and American markets today.

If the ECB required more evidence that a further cut in interest rates is urgently needed it came in the form of the German IFO.

The German corporate sentiment index fell in October to its lowest level since May 2003 on expectations the export sector will suffer a big hit from weakened foreign demand.

The Munich-based IFO economic research institute said that its business climate index, based on a monthly poll of around 7,000 firms, fell to 90.2 from 92.9 in September and well below the 91.0 expected. The latest German IFO and euro-zone M3 figures add further weight to the view that the ECB is set to cut interest rates aggressively.

In the US, sales of new homes increased during September by 2.7% as builders slashed prices and inventories declined. This somewhat encouraging news follows better than expected figures for existing home sales released last 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.

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.

How low can you go as Sterling is tarnished

Every few minutes this morning we are hitting new lows in Cable, Euro/$ and all crosses Yen related as well as seeing Stock Markets falling off.

Last evening we saw the Dow claw its way back from a 5-year low on some better than expected US Corporate results. The recovery however was short lived and Japan once again sold stocks all round following the Sony profit warning the NIKKEI fell to a 5 year low after losing 9.6% on the day and the continued strengthening of the Yen on the world foreign exchange markets.

This trend in equities was mirrored in Hong Kong and Singapore with European markets opening in the same vein. Spurious rumours of intervention kept traders on their toes but nothing tangible emerged so the rout continued.

Concern within the Japanese Ministry of Finance must be almost at fever pitch and that they are within a hairs breadth of acting to suppress the Yen’s inexorable rise.

Friday has historically been a favourite for the Japanese to act but they need the Europeans and Fed to be with them to have any chance of being taken seriously- we will see.

These markets can certainly be viewed as disorderly though, which is one of the stated criteria required to exist prior to any Central Bank action. It is worth noting that the Danish Central Bank raised their key lending rate this morning by 50bp to 5.50% as a direct result of intervention to support the Krone. Are the Danes market leaders?

Sterling itself looks decidedly dodgy with the headline cable rate falling to a new 5-year low but it must be remembered that although Sterling has softened on a Trade Weighted basis, down to 86.7 from yesterday’s 87.7 close, the move is very much Dollar and Yen strengthening rather than a focused kicking for Sterling.

Having said that, the article in the Telegraph this morning with predictions of a swift move to 1.5000 and comments from MPC member Andrew Sentence have added to the black cloud hanging over the market.

Sentence has now become very dovish indeed saying that a severe recession is more likely and that the MPC needs to factor negative forces affecting business into their future rate decisions. All this reaffirms the view that UK rates are going down, and in lumps.

Today’s release of GDP has reaffirmed the sell off and capitulated sterling to new lows against the dollar. EU data has also come and gone already with the individual countries PMI numbers plus the composite EU figure all coming in worse than expected.

Later on, the OPEC members get down to the nitty gritty of deciding by how much they cut their combined production and the breakdown for individual member states. There have been calls over the last couple of days for a reduction of 2.5 million bpd whereas in practice the cut will probably be agreed at nearer 1 million. Despite this, oil continues to fall on over-supply. Gold has also slipped again, back towards $700.

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 plunges on brown’s comments

We open this morning with Sterling looking almost sprightly following a couple of failed attempts overnight to force the rate down towards the 1.60 support level.

The fact that we bounced off 1.6150 a couple times makes that level a weak support for the moment but given current sentiment, is unlikely to provide significant resistance ahead of the weekend.

The Yen remains the Market’s favourite for now with further gains provoking Finance Ministry comments already this morning.

Well we know exactly how the strong Yen and the global downturn are affecting the economy.. 3 consecutive negative quarters for Industrial Production and very a very downbeat outlook from Sony gives us a bit of a clue.

Elsewhere the flight by investors/speculators (call them what you will) from commodities, commodity based currencies, stock markets and almost anything else that moves leaves us with a big question.

Where on earth are these funds going? Given that yield appears no longer a priority then it might go someway to account for the stronger Yen and the very low level of short date Dollar rates.

The Fed yesterday went someway to put a floor under the latter by tinkering with the formula by which they reimburse Banks’ excess balances held by the Central Bank.

In theory good, in practice we have still seen overnight Dollars offered at sub 1% this morning.

The MPC minutes revealed that, as expected, the vote to cut rates was unanimous. Given the committee wide agreement on the current problems that best the UK economy, there is a great possibility that we see a further 50bp cut at the November meeting and expectations abound that we will have Base Rate at 3% by some time in the 3rd Qtr 2009.

Given the magnitude of the expected total cut, one can see how short term investors are shying away from holding Sterling.

On the other hand, there must be a growing feeling that buying Sterling here and locking in the higher yields down the curve would prove to be a good strategy going forward. We will see which sentiment prevails.

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.

Nice One Mervyn

And there was Sterling looking a little smug against the background of the stronger Dollar.

Mr King’s speech to an audience of business-men in Leeds was downbeat in the extreme and the fact that he has always been dismissive of the academic definition of a recession, makes the content of his presentation even more worrying for the market and goes some way to explaining the reaction overnight.

The up-side for business and mortgage holders is that he underlined the dangers of an undershoot of the 2% inflation target and opened up the prospect of immediate rate cuts. Global interest rate differentials are therefore becoming much less prevalent as is evidenced by the surge of buying interest in the Yen, whose zero interest rates policy has recently been a mill stone for the currency.

Any bounce in cable is likely to come on the back of buying in Euro/$ and judging by the comments on the screens this morning, any move higher will be met by a further wave of selling. So the outlook for today looks grim for both Euro and GBP.

Commodity prices have also fallen after yesterday’s short reprieve. Both gold and crude oil encountered a degree of bounce yesterday – gold on safe haven buying and oil on the settlement of the November futures contract.

This morning both have resumed their lack-lustre trading pattern with oil especially vulnerable on over-supply concerns. This, outweighing the prospects of a more aggressive production stance from OPEC following Friday’s get together.

No major US data releases today and little from the Eurozone. This leaves the release of the minutes from the BoE meeting as the focus.These will be released at 9.30am today will show that its monetary policy committee (MPC) was unanimously in favour of the emergency decision two weeks ago to cut rates by half a percentage point.

It would be a real surprise, given the concerted global nature of the rate cuts if any member of the committee dissented from the BoE directive. MPC members have made few public comments since the October rate decision, however, Andrew Sentence, regarded by many as the most hawkish of the MPC committee, warned last week that the chances of a severe UK downturn had increased.

After the 8th October joint action with other major central banks, the BoE said there was a growing risk that UK inflation would undershoot its 2 percent target over the medium term (18 or€“ 24 months), and economists will be closely eyeing the report for clues on how fast the BoE will cut rates to help the slowing economy.

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.

Bernanke comments give the markets hope

Yesterday’s fairly restrained market was kick-started into life in the afternoon by comments from the Federal Reserve Chief, seemingly directed at Congress, in which he intimated that the US economy required a new fiscal stimulus to get it back on track.

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.

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.

As we start the last week of Summertime

Wise Money begins the Financial Markets week in the same vein as we spent most of the last few days, with a previously supposed rock solid institution, ING, having to seek Central Bank injection in order to strengthen its capital position.

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.