Articles from December 2008



ECB tweaks deposit rates to encourage more interbank lending.

The ECB cut the rate it pays to deposit overnight money and increased the rate it charges for emergency loans.

The concern from the ECB is that whilst they have slashed their base rate at the fastest pace in the ECB’s 10 year history to 2.5% it may not be enough to stimulate the economy as long as banks are refusing to lend to each other.

Banks globally have little confidence in one another and consequently are hording cash and tending to deposit with the Central Banks.

From 21st January the ECB’s deposit rate will drop to 100 basis points below the base rate and the marginal lending rate will be increased to 100 basis points above it. Euribor set yesterday at 3.13, the lowest level since July 2006 – but still 63 bp above the base rate; in the seven years to August 2007, before the credit crisis began, the gap averaged only 15bp.

Trichet said on 15th December that there is a limit to how far the central bank can pare rates whilst yesterday Charles Bean (a UK MPC member) signalled that the UK could see rates reach 0%.

This divergence in outlook is continuing to stoke the negative outlook for the sterling euro cross. No doubt Euro zone exporters are hurting as we look towards parity. GBPEUR is currently trading at 1.0617 levels having rallied slightly from the record low seen at 5.20pm yesterday of 1.0456.

Sterling was hammered again yesterday, it is currently trading arond 1.5030 level but looks set to test yesterday’s low of 1.49. This decline in Sterling from a peak of 2.0335 on 13th March to the year low seen on 4th December of 1.4680 represents a drop of 27.8%. This is the steepest yearly decline since the height of the Great Depression in 1931 when the pound was forced off the gold standard.

France’s manufacturing confidence fell to the lowest level in 15 years in December, adding to signs that Europe’s third largest economy may move into a recession for the first time since 1993.

Elsewhere, the Bank of Japan cut its benchmark interest rate to 0.1% (from 0.3%) in an effort to boost the economy. JPY saw a 13 year high yesterday against USD of 87.14 and is currently trading at levels of 88.55.

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.

New lows for Sterling

Another day and more record lows for GBP/euro are€“ currently at all time lows.

This cross is trading in uncharted territory and is struggling to find support with many expecting to see parity before the year is out. However, UK retail sales just out at better than expected levels (0.3% versus -0.6%) should lend support to GBP over today’s session.

UK Unemployment out yesterday would not have helped GBP as the headline figure rose to 1.07m for November; a jump of 75,700 from October. This is the largest rise since 1991 and does little to quell fears of continued redundancies in London in 2009.

Japanese yen has also been in the headlines hitting record highs of 87.15 last night. JPY is currently trading at 87.68 and may well test yesterday’s high again.

Japan’s Central Bank meet tomorrow and there is speculation that they may well cut rates close to zero in an effort to stimulate their economy. Falling global demand has hit Japan’s economy hard as they have such a export focus. Japan’s rate is currently 0.3%.

Economists are also speculating about the ECB cutting deposit rates as soon as today in an effort to stimulate interbank lending. Cutting deposit rates (from current 2% on overnight cash) would make holding cash with the ECB less attractive and hopefully free up capital for consumers and companies and help the interbank market.

Ever since Lehmans collapsed banks have been very cautious about lending to one another. The Euribor (the euro interbank offered rate) set yesterday at 3.16 which is 66 basis points above the ECB rate.

In commodity markets, yesterday Opec agreed to cut production by a record 2.2m barrels per day but the price of crude oil has continued to fall. Oil has fallen by more than $100 from a record of $147 in mid July to current levels of $43.21 (Brent Crude in London). Opec has cut production three times since September and Opec accounts for 40% of the World’s oil production.

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.

Zero rate interest rates

The Federal Reserve, at their meeting yesterday evening, cut the Federal Funds target rate (the rate at which US Banks can borrow in the overnight) by a massive 75bp to a range of 0% to 0.25% and was additionally very aggressive in the statement that followed.

The decision was unanimous amongst the Board, and the Committee expanded by stating that they were committed to keeping the rate at “exceptionally low levels” for “some time.” Quantitative easing itself was not mentioned but there was reference to less conventional methods for the continuation of current policy.

Given that the rate is now essentially zero, economists feel like this was as aggressive as the Fed could get without getting into dangerous territory. Wall Street surged and the Dollar collapsed.

This morning, stocks have retraced and the Dollar remains weak. The outlook for the Dollar has to remain a little rocky in the near-term, more-so against the Euro than Sterling with a distinct possibility of seeing 1.4700 before the Euro tops out.

Sterling is struggling to keep up with the Euro so far which isn’t surprising given that this morning’s release of the minutes from this month’s MPC meeting showed a 9-0 vote in favour of the 1% cut and that the committee discussed the possibility of making an even larger cut.

The Fed’s action has now instilled in the market the view that the MPC will be compelled to act aggressively and likely sooner rather than later. the ECB, however, are seen to be dragging their feet especially given Trichet’s hawkish comments that there were €˜limits to rate cuts. Sterling again hits an all time low against the Euro this morning.

Today we watch and wait. We have a CBI survey released later this morning and the interest rate decision from the Norges Bank this afternoon. Otherwise we will look to Wall Street opening as the catalyst for the next move.

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 interest rate cuts

Following the marginally weaker than expected data yesterday afternoon and a growing anticipation of a greater than 50bp cut in the Fed Funds target rate this evening.

We saw highs in cable and euro at a tad over 1.5350 and 1.3725 respectively before caution again took the upper hand. Today, consolidation at these slightly lower levels, ahead of today’s FOMC meeting, looks the solid play with only US CPI and Housing Starts data this afternoon likely to cause any ripples.

We have already seen worse than expected French and German manufacturing and services PMI numbers plus the first fall on record for Qtr/Qtr Eurozone employent which really ought to quell any great desire to buy Euro from here.

The Stock and Commodity Markets, in contrast, should be reasonably lively. It is interesting to note that Goldmans have started to look more bullish on European paper and packaging companies – a sector that in normal circumstances has been a portent of future moves in the economy.

Traders are also looking to automotive stocks for movement after France becomes the first country to provide credit guarantees to the financing arms of its carmakers with a Euro 779 million payment split between Renault and Peugeot.

A sighter for the US and UK perhaps with the Germans to follow. The market remains concerned over the prospects of a failure to achieve a rapid solution to the US automakers’ bailout package however.

The Bush administration is attempting to figure out how much aid they can provide at a minimum and how to fund it while trying to balance expectations for other industry bailouts and the timing of any assistance remains up in the air.

Press reports suggest anywhere from $10bn to $40bn could be extended to the automakers and the funds could possible come from the TARP. However, since most of the first tranche has been used, Congress would have to approve the release of the second tranche for any auto bailout.

Oil has firmed ahead of an almost guaranteed production cut by OPEC at this weekend’s meeting. The call is for a 1 – 2 million barrel per day reduction with a perceived €˜acceptable price of oil at $70-75 per barrel to be targeted.

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.

Little new data out over the weekend

Thus there is very little new news to direct wise money and the markets.

The automotive and aviation industries obtained most coverage with expectations that the bail-out of the Big 3 US car manufacturers will be looked at again early in the week and re-presented for approval whilst there is a lot of talk afoot that funds will be made available for the UK car industry from Government.

The large aircraft manufacturers appear to be heading down a different route with anticipation rife that they will offer billions of dollars of loans to €˜buyers’ in order that the sector remains active.

This week looks as though it could be lively given both the illiquidity of the markets as we approach Christmas added to Tuesday’s FOMC meeting in the US plus the release of this month’s MPC meeting minutes on Thursday.

Expectations are that the Fed will cut rates by at least 50bp but interest will centre on additional measures and/or comments that might accompany the decision. A new dimension will be added to the Sterling saga if, as the Sunday Times pontificates, the strength of the Pound is beginning to carry weight with regards to cutting rates.

This argues that given the current level of GBP/EUR, cuts in the 1st Qtr 09 might not be quite as frequent or of the same magnitude as over the last 3 months.

Predictably hawkish comments from 2 ECB members, Stark and Trichet will not help the outlook for Sterling/Euro.

Today we have only US industrial production and capacity utilisation scheduled for release and you wouldn’t get a Nobel Prize for predicting that the numbers might not be so good. Otherwise we await developments on the car company bail-out.

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.

Nationalisation of US car markers looks bleak for wise money

And looks like an absolute disaster for Stocks, Commodities as well as just for a change, Sterling.

The Senate in the US last night, rejected the $14 billion bail-out plan that would have seen a deferment of the cash crisis at GM and Chrysler much to the dismay of markets that were still operating at the time of the decision.

The Dollar spiked to 1.3400 against the Euro but eased back again and the stock futures indicated lower openings today. They weren’t wrong. Global auto manufacturers shares have plunged on the opening of the European bourses with fears that Wall street is going to be a bloodbath.

European banking stocks are also on the slide following the trading update from HBOS (ahead of the EGM to approve the takeover by Lloyds). The Bank revised their impairment charges for the year to date by GBP 3.3 billion to give a total hit for the year of GBP 8 billion. All Banking stocks slid by just under 10%.

The main beneficiary from the turbulent Stock Markets is the US Treasury market where lower yields are being seen day by day. Investors are happy to swap yield for security at present.
Interest rates continue to ease.

Taiwan joined the Koreans and Swiss in cutting rates yesterday and with India’s factory output falling for the 1st time in 13-years, expect the Reserve Bank to be cutting Rupee rates sometime very soon. Russia were also very high profile in the managed devaluation of the rouble. So with all this going on, and a global recession still very much deepening, why is it that Sterling looks so weak and the Euro and Yen so strong?

Given that the latter 2 currencies come from different ends of the interest rate spectrum then it can’t be down to yield. Therefore, you have to work on the basis that every industrial country in the world is now looking to allow their currency to devalue in order to make their exports more attractive so that demand from abroad kick starts their own economies.

All well and good in normal times but it is very obvious that not all currencies can devalue at the same time (at least one has to be the recipient of the diversification and appreciate) and it is the Euro and Yen that are adopting this role for now.

The euro for now is very important because it implies that in order to emerge from their own recessionary periods, the economies in Euroland and Japan will need the added stimulus of weaker currencies.

Therefore Sterling’s weakness does look temporary, if not overdone, BUT in the short term the market has 0.9000 in its sights. The saving grace might be the declining numbers of participants in the market as we get closer to the Xmas holidays.

In the meantime, Sterling has again made record lows against both the Euro and its Trade Weighted basket.

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.

Credit crunch weighs wise money down

but it is Sterling that continues to bear the brunt of investor’s concerns.

The headline in the The Times this morning caused a quick skip in the heartbeat, “Banks under the cosh as £1 tumble towards Euro 1”. Wise Money wondered what on earth had occurred overnight !!!

As it happened, the headline was very much €˜for effect rather than based on the actual. Sterling is indeed at an all-time low against the Euro but over the past few days has actually stabilised at these levels.

The outlook remains clouded with a big danger of a further ratchet lower but as more dire news emerges from Eurozone, the prospect for a lower cross will diminish. On that note, the magnitude of the declines in both French and German industrial output, reported earlier in the week, were staggering.

This doesn’t bode well for tomorrow’s industrial output report for the whole of the Eurozone where the estimate is for a decline of 3.7% year-on-year. Somewhere down the line, probably not now until the New Year, there will be a re-assessment of exchange values with, in my view, the Euro being downgraded against all the majors.

We are now in the €˜dead-zone data wise with nothing scheduled to come from the UK or Germany for the next 2 days and only the Ind Prod number from the EU. The US and Canada are slightly more exciting but the whole pre-Xmas lull appears to be well and truly upon us. We do have the UK CBI monthly industrial trends survey later this morning but there are no prizes for guessing the mood of that.

As if to pre-empt the figure, the BoE’s Kate Barker, in the Scottish Herald paper, lays the situation out – bleak on the economic assessment, with any recovery in the UK unlikely to be evident until the 4th Quarter of 2009, with the likely pace of recovery, very hard to judge.

Elsewhere the big news overnight was the Korean central Bank cutting their official rate by a massive 100 basis points to a record low of 3%. This €˜super-investor in US Treasuries has now cut rates from 4.25% in early October in an unprecedented series of reductions and cites the need to tackle the persistent credit crunch and help the economy to cope with the global downturn.

This morning, the Swiss National Bank have also further reduced their rates by another 50 basis points, bringing their target band down to 0 – 1.00%.

In the US, The House of Representatives agreed to a $14 billion interim loan to GM and Chrysler to tide them over. The affirmation of the bail-out, however, still requires a positive vote following the Senate debate on the matter later today. If passed, this would just sees the two companies through to March 31st the deadline by which they must file restructure plans (and even then they are not safe).

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.

Interest rate announcements are in the spotlight

But neither having a materially long-term effect on exchange rates. The market perception of lower interest rates to come remains unchanged in the market but differences of opinion as to magnitude of cut and timetable are starting to emerge.

Comments from Trichet and Andrew Sentence yesterday added to the uncertainty with the former intimating a pause in ECB rate cutting whilst Sentence appeared to argue both camps for Sterling.

The traditionally arch-hawk of the committee warned of a further weakening of the manufacturing sector in the UK (this followed the report that industrial output in October had fallen by 4.9% y-on-y – the biggest drop in over 6-years) with the recession lasting longer and going deeper than had been previously forecast.

He warned however that policy makers needed to look at different methods for handling the problem implying that interest rates being continually being reduced has less and less impact going forward.

The Zew data from the Eurozone and Germany yesterday were terrible which immediately caused the Euro to tumble through 1.2800. Rumours of semi-official demand however, caused the market to pause which was enough to see it rise sharply back towards 1.3000 where it stopped and near to where we start today.

Sterling fell on the weak UK data and then was hit with the double whammy when Euro rose against the Dollar. This left the cross hitting a new all-time low below 1.1400. This afternoon’s testimony in front of the Treasury Select Committee by the Chancellor, Alistair Darling looks like the next chasm for Sterling to negotiate. Although neither party will be out to put the skids under Sterling, the conversation and comment might be viewed very nervously from abroad.

Elsewhere the Canadians did indeed cut their rates as expected but by a larger amount, 0.75%, than had been anticipated. More rate cuts to come from them in the near future. The same conclusion can be reached for Sweden following the release of the sharpest fall in inflation (down from 4% to 2.5%) in their country in 15-years. The Riksbank are expected to progress with their rate cutting programme, with a target of 1% being achieved over the next 3 policy meetings.

In the US, the extreme short end of the Treasury market remains the focus. On Monday, the 3-month bill auction was completed at a yield of a mere 0.005%, but that was surpassed by the 4-week bill sale last night. The minimum bid rate was set at 0.00% with the ‘high’ bid being established at -0.06%.

In addition, even with a zero yield, the issue was covered 4.20 times and amazingly €˜non-professionals’ took 47% of the total – the second largest participation on record. In other words, it wasn’t just dealers causing those incredible results – the non-financial market is also quite willing to accept a zero yield (or less) in return for through year-end safety.

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 sales down again

In November, the BRC survey showed on Tuesday in a grim portent of the all important Christmas shopping season. Sales fell 2.6% y/y in November, the sharpest drop since the Easter influenced April 2005. Not a good sign.

This morning Wise Money was trying to be a bit positive following the rise in house buyer interest shown in yesterday’s RICS survey. Admittedly, the actual number of sales slumped to a new 30-year low but at least the interest in property was on the increase.

This, added to the further sharp declines in inflationary pressures from easier Producer Input Prices (down 3.3% in November alone for a 12-month 7.5% rise) put the skids under Sterling – especially versus the Euro where we established a new all time low. Other than that, yesterday was a bit thin on data so we look to today’s offerings for a bit of stimulus.

We have important statistics from Germany and the EU this morning as well as further housing and trade data from the UK. On top of that, there are several Central Bankers speaking on their various economies and the expectation that Canada will cut their interest rates at their meeting this afternoon.

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.

Credit crunch weighs wise money down

Only time will tell, but there are increased mutterings that data for the 4th Qtr of 2008 might prove to be as bad as its going to get.

With the sharp falls in GDP forecasts for the €˜industrial nations, accompanying massive rises in unemployment, the outlook still looks grim. All the negatives however are starting to be countered by positive moves from the Governments with regards to fiscal stimulus in conjunction with the already seen, monetary easing.

The US, Canada and UK are all intent on kick-starting their economies through good-sized packages. The €˜almost agreed bailout of the Big 3 US car manufacturers goes towards proving this point.

Only the Eurozone appear to be dragging their collective feet and therefore it will be said region that will recover more slowly than the rest through a continued lack of demand. Even the VERY bad news is having less of an effect on markets.

The non-farm payroll numbers from the US on Friday were horrifically large with the figure coming in much, much higher than market consensus. Did this pull away the rug from beneath the Dollar?

Well not in the way that it would have done in years gone by. It shows that investors and traders are now fully braced for the severe recession and that tolerance for bad news is now far greater than has been seen up to now.

Looking ahead this week, top-tier data is lacking but several speeches by Fed Reserve members will be in focus as the FOMC meets next week. The Fed have signalled in the past that there is no floor for the Fed Funds rate and discussions over quantitative easing will likely re-emerge.

Elsewhere, the German ZEW survey tomorrow looks to be the highlight with the numbers expected to reinforce the opinion that the German and hence the Eurozone economies have further to decline before any sign of the green shoots of recovery.

From the UK, economic data is almost entirely focused on tomorrow when we get the BRC Retail monitor, trade numbers and industrial production.

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.