Articles from November 2008



Quiet day for the Wise Money

In terms of volumes and liquidity left us trading very tight ranges yesterday and with tradition dictating an early close today in the US equity markets and with a lot of the rest of the workforce extending the holiday into the weekend, we are destined for another quiet one.

There is also very little data on today’s agenda and nothing market sensitive scheduled for the weekend.

This morning so far we have already seen a slightly better than forecast result for UK Consumer Confidence, much in the same vein as the rest of Europe and are left awaiting the CBI Distributive Trade Survey.

This is anticipated to be a weak number once again and with all the High Street bad news in the press, is likely to remain soft going forward. The FT, in an article this morning, €˜rubber stamp a 50 basis point cut by the ECB next week, which the market still feels will be the first of a few cuts in the coming months.

The UK still also expected to reduce rates by the same magnitude but the weekend press will be important for the health of Sterling going into December.

Other than that, we have the EU flash estimate for inflation and unemployment later this morning but that should be too little and too late to influence today’s end of month trading. This weekend sees an OPEC consultative meeting taking place in Cairo which should pave the way for discussions on a production cut at their official meeting later in December.

There are mutterings that OPEC want to reduce the current OECD oil stocks fall by about 100 million barrels to around 52 days of forward cover from its present 55 days.

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.

Thanksgiving Day Holiday in the US

US bank holiday will leave the markets desperately thin this afternoon with complete closure of their fixed interest and equity markets plus there being no Dollar cash settlement today.

Yesterday saw a bit of an up and down day on the stock markets with the US indices ending higher at the close on bargain hunting for technology and energy stocks. this has filtered through to a better opening in European bourses and will hopefully hold for the rest of the week.

A bit of positive Corporate news would help but at present, that doesn’t seem to be on the cards. The sad demise of Woolworths and MFI along with the less than buoyant economic data lend themselves to this being another of those false dawns.

Yesterday’s economic data from Europe, UK and the US all failed to inspire and although the numbers came in as expected, they did sound a bit like Frankie Howard’s soothsayer with her €˜Woe, Woe and Thrice Woe’.

GDP figures affirmed, as if we needed it, that the UK and US are deep in recession and there is concern that the measures that have been taken by Governments in all areas to combat the downturn might take an overly long time to trickle through. Pressure will be on to make sure that the initiatives are effective.

The weak US data had an adverse effect on the return on US Treasury Bills with yields hitting 50-year lows. The yield on the 10-year note dropped to its lowest ever level, down 0.13% to 2.98%.

As reported yesterday, China cut rates savagely, the largest reduction in 11-years, in reaction to the rapidly falling growth rate in the country. Even though the economy is still growing at about 7.5% per annum, this level of growth is the minimum required increase for the country to effectively ‘stand still’.

The Chinese leaders are obviously very concerned. Metal prices jumped on the back of the 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.

Global finance drifts lower

Data scheduled to be released today/tomorrow from the German states followed by the figure for the country as a whole, are expected to show a further profound slowdown in perceived inflation.

The overall figure is expected to show a fall in the November CPI of 0.2% with HICP at +1.7%. This, coupled with recent weak economic data, MUST push the ECB to cut rates by at least 50 basis points at their 4th December meeting.

Given this morning’s announcement from the Chinese Central Bank that they are reducing both their interest rates and domestic banks’ required reserves, “to ensure enough liquidity in the banking system to aid growth”, and following the decision from the Swiss National Bank last week to cut their rates, it looks as though we will see further BIG cuts in Official Interest Rates from all the major economies by Christmas.

The one abstainer will be Japan who do not have the scope to cut, a situation that will be mirrored in the US very soon, once their own rates get down to 0.5%.

The one bright point on the economic radar at present is the up-tick in global consumer sentiment with higher than expected figures seen from Germany, US and the UK over the past few days and from France this morning.

With consumers’ feel-good-factor largely reliant upon stock markets and fuel prices, it is the recent sharp drop in petrol prices that seems to have been the catalyst. Don’t hang the flags out just yet.

A further package of US Government / Federal Reserve assistance was announced yesterday afternoon by the soon-to-be-replaced Treasury Secretary, Paulson. He added an additional $800 billion to the already burgeoning sum in the pipeline. this takes to $ 1.7 trillion the total taxpayer funds being used to bail out America, with a further $500 billion of tax cuts in the pipeline.

It just shows just how astounded Washington is at the severity of the recession and the speed at which it is affecting the country.

Exchange rates moved consistently with the technicals yesterday with cable shying away from the 1.5500 level overnight to open 1.5 cents lower this morning.

Ahead of tomorrows market closing Thanksgiving holiday in the US, expect to find exchange rates a bit subdued today. There is plenty of data from the US this afternoon but given the current state of thinking, none of it should seriously worry the markets.

The European traders will need to fill the gap between 1.5380 and 1.5520 today before they consider which way to push it. I would look for a further move higher over the next few weeks but with interest rate differentials definitely narrowing in the Dollar’s favour during the 1st Quarter 2009, expect a modicum of Dollar strength to ensue.

Keeping the Dollar under pressure in the short term, if it is correct, is a report in the Times that Middle East Sovereign Wealth Funds are switching out of investments in western markets to focus on domestic considerations.

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 doesn’t feel any better off

The Chancellor duly delivered his pre-Budget Statement to an enthralled world and largely produced what had been anticipated.

The known factors are worrying enough, the unknown components of the cure will keep economists employed for years to come, pontificating the why’s and the wherefore’s.

An interesting quote within an article in the Times this morning attributed to JK Galbraith; €˜there are 2 types of economists, those who don’t know what will happen and those who don’t know they don’t know’. Over the next few months/ years, there will be plenty of the latter.

Anyway, both Sterling and the Stock Market ended higher; more on a weaker $ and on relief over the Citicorp rescue than a passion for all things UK related but was not well received by the Gilt market which in turn pushed up the price of hedging against losses on labour government bonds (CDS’s on gilts).

In other words, the UK as an investment was perceived to be less secure at the end of the day than it had been at opening.

Yesterday saw the November German IFO index of the business climate dive off once more to a cyclical low of 85.8 the record low was back in October 1982 at 76.7. This however marks the starting point for a lurch lower in statistics from both Germany and the Eurozone.

Today’s 3rd Qtr German GDP release will undoubtedly be the portent for sharply lower 4th Qtr figures to come. From this we can see that the latest news is decidedly not good. The economy is spiralling downward towards zero with the pace of price increases following the same road.

This is a good scenario for bonds but bad for everything else. We have 3rd Qtr GDP for the US, this afternoon and the same for the UK tomorrow. A great chance for a comparison of the 3 economies.

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.

UK tax increases loom

For those of you who have been away on a desert island for the past few weeks, today sees the UK Chancellor unveil his Kick Start for the economy thinly disguised as his pre-Budget Statement.

It is difficult to ascertain just how much of the recent press coverage is actual and how much is speculative. Suffice to say that whatever emerges will be the blueprint for the economy for the next couple of years and the analysis of the measures will determine the immediate direction for Sterling on the exchanges.

The one factor that is a cast iron certainty is that the BoE/MPC will be cutting rates further in December. The statement to Parliament commences at 3.30 this afternoon.

Also on interest rates. The ECB President said on Friday that the ECB could cut interest rates again at their meeting next month. These comments were echoed by 2 other €˜high powered members of the Central Bank but it wasn’t until ECB Director and Chief Economist Weber said the same thing later in the day, that anyone took any notice.

He talked off a remarkable decline in inflationary pressures and deteriorating economic prospects and culminated by stating that the Central Bank had leeway for further easing, if necessary.. it still looks as though we will see Euro interest rates 75 to€“ 100 bp lower by the spring.

Over the weekend we have seen further bail-outs, cash raising and capital increases in the Banking Sector. The most significant was the US Government ‘rescue’ of Citigroup Inc, the second largest bank in the States, to the tune of $300 billion.

After last weeks continued weakening of the sector, this has come as a welcome reprieve with Banking stocks surging on the European bourses first thing. From the UK, Standard Chartered decided to raise £1.8 billion via a cash call to boost its capital base probably more to do with that they could rather than that they needed to.

Meanwhile in Ireland, the Irish Government has agreed to take part in a Euro 3 billion bail out of Bank of Ireland that will be led by private equity probably of US origin.

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 turn to next week

The reaction to the combination of yesterday’s UK data and US rate moves was baffling to say the least.

One would have assumed that the combination of much better than expected UK retail sales figures (a fall of 0.1% against expectations of a 0.8% drop) and a sharp drop in US Treasury yields might have given cable a bit of a leg up enabling it to hold above the important 1.5030 level.

As it happens, the total opposite occurred, with Sterling losing ground against all the majors and one must conclude that it is concern about i) the UK economy ii) the continued move for sharply lower UK interest rates iii) the UK Government’s exchange rate policy.

There are strong negatives associated with all three factors and so, ahead of Mr Darling’s pre-budget statement on Monday, we are likely to see Sterling vulnerable to the downside.

Sterling LIBOR rates continue their orderly march lower with rates opening another 4-5 basis points lower than yesterday’s opening levels. This steady decline must tail off as we approach the next MPC meeting but with expectations of (at least) a 0.50% cut to be announced on the 4th December, rates will likely resume the move lower after that date.

I would anticipate seeing the yield curve steepen unless the Chancellor introduces any of the dreaded ‘quantitative measures’ in his statement to try and force rates lower across the spectrum.

Developments and data from the US yesterday continued to weigh upon both the currency and the stock market with appalling jobs data and ongoing concerns over the future of the US automotive industry the major factors.

Representatives from Detroit, arriving at Capitol Hill, begging bowls in hand (having flown in by private jet !!!!) were told to go away, think about their proposals and come back early next month with more appropriate requests.

Wall Street was spooked by rumours of problems with the BoA/Merrills merger and with the re-capitalisation measures being attempted by Citibank. The number of American workers on the US unemployment register surged to a 25-year high, climbing by 542k to about 4 million. If the economy is turning round, its not yet apparent.

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.

More interest rate cuts to follow

The minutes from this month’s Monetary Policy Committee meeting revealed that the MPC recognised the need for a cut in rates of at least 200 bp to ensure that their long-term inflationary goals would be met.

However, they decided that a cut of this magnitude might have serious adverse effects on the value of the currency and hence distort inflation measures in the short term. They also decided to keep at least some of their powder dry so that additional easing could be introduced at later dates in order to try and improve sentiment as/if the economy worsens.

On the back of this it looks odds on that we will see a further cut at the December meeting with the market looking for a 0.50% move lower in rates. Period rates ought to continue to ease on this assumption but so far, there has been little evidence of this happening to any great degree.

Yesterday, we also had the presumed gloomy CBI Manufacturing survey and the market was not disappointed. Despite a small up-tick in the orders index, the overall report was awful with the November index of expected orders falling to a 28-year low. More ammunition for the €˜further rate cuts brigade.

Today will bring the October data for UK Retail Sales. There is absolutely no doubt that the figures will be grim following press reports of dismal High Street conditions and pre-Xmas sales announcements from such stalwarts as Marks & Spencer, John Lewis and Debenhams.

It would not be a surprise if, even in the Xmas run in, we saw a complete standstill in consumer spending y-on-y although the expectations are for a small rise.

The Federal Reserve minutes from the last meeting were also out yesterday afternoon but followed a similar pattern to the UK version. The Board revealed a gloomy economic outlook with potential for further monetary easing. They lowered their estimates for GDP and increased their projected unemployment level, both for the end of 2009.

One thing that was mentioned in the minutes, and something that will crop up more and more in the future given the global economic situation plus the ultra low level of interest rates, is €˜quantitative easing. This entails a government introducing measures that not only flood the market with excess liquidity but also reduce long term interest rates.

Last used in Japan during their long period of deflation (not to any great effect for a long time I add) and likely to become more popular amongst Western Governments during a prolonged grind down in economic activity.

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.

Inflation finally starts to fall

The UK Office for National Statistics yesterday reported that the headline inflation rate had its biggest 1-month decline in the past 10 years.

The CPI year-on-year rate was reported at 4.5% higher in October compared to a 5.2% annual rise in the year to September. The core CPI number (which does not include price moves in energy, food, alcohol and tobacco) also fell, from 2.2% in September to 1.9% in the year to October.

Even though the headline figure is still well above the BoE target rate of 2%, the expectation is for similar falls to occur over the next few months. This will enable CPI to hit the 2% by spring next year.

The problem then, as flagged and acknowledged by the BoE in its Inflation Report, is that the fall will not stop there and we are quite likely to see the headline rate fall to zero during 2009. This will create a whole new raft of problems for the MPC and Treasury.

This trend in prices data will be mirrored in all the major economies as lower rates and easier commodity prices filter into the respective economies. Therefore expect to see similar falls in inflation in the Eurozone, US and Canada over the coming weeks.

Officials around the globe are already beginning to douse expectations for continued large cuts in interest rates with both Trichet and the Fed’s Stern questioning the wisdom and long-term benefits of further large cuts in their respective currencies.

Today we have a fun-packed day in prospect with minutes from both the last meetings of the MPC and Federal Reserve scheduled as well as an anticipated gloomy survey on Industrial Trends from the CBI. This afternoon, prior to the Fed minutes release, we get US CPI and Housing Starts.

The CBI report is likely to make grim reading especially given the recent proliferation of downbeat Corporate trading statements. The survey number itself will undoubtedly hit a new low for this cycle (expected -41 from last month’s -31) but will remain well above the all time low for the survey of -61 recorded back in October 1991.

Trouble is that the figure is still heading the wrong way and so the question is now being asked, “Is this recession worse for British Business than the downturn in the early 90s?” This indicator MUST be watched for the answer.

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 rises like a Pheonix

On the back of very little, Sterling bounced quite sharply against both Dollar and Euro yesterday and retained most of the gains overnight.

It appears that the market views the stance being adopted by the UK authorities in a mildly positive manner, especially given the apparent continued deterioration of the Eurozone and US economies.

Following on from that, the initial elation at the headline rebound in US Industrial Production yesterday dissipated once the grim and declining trend was revealed.

The severe downward correction to September’s figure and the removal of the post-Hurricane Ike effect leaves a very sorry picture and immediately provoked calls/demands/predictions of a 50bp interest cut at the next Fed meeting in December.

This flies in the face of comments by the Fed’s Hoeing who noted that the economic downturn was worse than expected but that the Central Bank was already running “a very accommodative” policy. Importantly, he added that they had done about as much as they were able to aid the economy.

Against this, the San Francisco Fed’s own staff economists expect the US economy to continue to contract through the 1st half of 2009 and that the unemployment rate will hit a peak at around 8.00% from its current 6.5%, still well below the post-depression peak of 10.7% reached in 1982 although that is no foregone conclusion.

Short date interest rates continue to ease with supplies of funds at this end of the curve in plentiful supply. Period rates still remain stubbornly higher as demand for longer term remains far greater than the current supply. This will likely continue for some time to come until confidence returns.

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.

G20 meeting is a let down

The results from the G20 meeting are at first sight disappointing.

Barack Obama didn’t show, there was no mention of further co-ordinated monetary easing and no agreement on the wisdom of a large global fiscal stimulus. Only an agreement to lay out a work plan, to be finalised before the next get-together in April next year, to strengthen the oversight and regulation of Financial Institutions.

Although this is an important exercise to convince people that Governments will now allow this type of mess to reoccur, the very nature of the proposed plan must be flawed. It is very unlikely that the €˜next crisis will be of the same type as the current one yet regulation will only be introduced that tackles the current crisis.

I still think that further monetary easing had been discussed pre-Washington and that we are likely to see moves in interest rates this month. The next official rate meeting is in Japan on Friday but with their rates already at 0.3%, no change is expected.

Talking of Japan, they are the latest sovereign state to admit slipping into recession following the declaration of the 2nd consecutive negative GDP figure. No surprises here and little reaction on the exchanges.

The Bank of France have followed the trend, predicting that 4th Qtr French GDP will come in at -0.5%. In fact, global data on growth, consumer demand and inflation has recently become very predictable and effects on markets minimal.

The next big reaction will undoubtedly come from positive news from one of the major economies€“ only not just yet. This leads nicely onto pontificating whether Sterling has fallen enough against the Euro especially to enable the UK’s potentially massive trading advantage to have an effect on manufacturing and exports and hence the value of the Pound.

Over the months to come, more and more pundits are going to be trying to pick the base of the exchange rate and eventually someone will be right. These levels do look fantastically cheap and assuming that Gordon Brown and Alistair Darling have got their sums right and also correctly predicted the mood of the country then lower rates could be seriously viewed as a plus point for Sterling.

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.