George Osborne mallets the bankers

Yesterday started with a big surprise as UK Chancellor George Osborne announced a hike in his special tax on banks. George Osborne mallets the bankersMr Osborne plans to raise an extra £800m, but with the deal announced just days before bank bonus season begins in the city, political rather than economic reasoning seems to be governing motive behind the announcement.

Sterling reacted by falling all day against the Dollar and Euro, and the theme looks set to repeat itself and follow the line of least resistance after disappointing trade balance data earlier this morning and the lack of any clear direction going into the Bank of England rate decision tomorrow.

Rumours of a symbolic rate hike by the Bank are swirling (as they do every month) but one would expect Sterling to already have reacted if there were any substance to it.

No change to rates and the QE program is the widely expected announcement and with the bank wheeling out the Hawks last week for a media offensive on inflation expectations, one would think they would wait to see if this has had the desired effect rather than shocking the markets with a rate hike.

Three Federal Reserve members took to the dispatch box last night, peddling the party line that QE2 will be completed as planned and that further stimulus will probably not be needed.

The announcement pushed the yields on US Treasuries higher and was probably the reason for the Sterling retracement against the Dollar and the move through 1.36 in the Euro-Dollar pair.

We are in for another quiet day, but in terms of what to look for this later this week for the Dollar, Fed Chairman Ben Bernanke speaks this afternoon and we have the weekly jobs number on Thursday.

UK economy grew at faster than expected rate of 0.8%

The UK’s economy grew at 0.8% between July and September official figures show- showing that the economy is recovering faster than expected.UK economy grew at faster than expected rate of 0.8%It follows 1.2% growth in the second quarter of the year, and is double the 0.4% expected by analysts.

Meanwhile rating agency Standard and Poor’s upgraded its outlook for the UK’s triple-A credit rating.

Chancellor George Osborne called both reports “a vote of confidence in the new government’s economic policies”.

The gross domestic product (GDP) figure released by the Office for National Statistics (ONS) is only a first estimate, and may be revised up or down.

Analysts had expected a slowdown after weak retail sales and housing data.

But the government’s planned cuts in its Spending Review got a stamp of approval from ratings agency Standard & Poor’s, which raised its outlook for the UK’s triple-A rating back to “stable” from “negative”.

“In our opinion, the decisions reached by the United Kingdom coalition government in its 2010 Spending Review reduce risks to the government’s implementation of its June 2010 fiscal consolidation programme,” the company said in a statement.

The Treasury will take heart from the robust growth performance even with the first spending cuts beginning to bite.

Manufacturing and services both kept up their momentum.

The recovering construction industry contributed almost a third of the total GDP growth for the quarter. The building industry has been dealing with a backlog of work that had been postponed from the beginning of the year due to bad weather.

However, the latest data suggests that the recovery may be becoming slightly broader-based.

Manufacturing slowed to 0.6% from 1.0% the previous quarter, but was still ahead of predictions.

Service industries also held steady at 0.6% growth, with the transport, storage and communications sub-sector returning to growth.

The Pound jumped following the news, which lowered expectations that the Bank of England will engage in further quantitative easing in the near future.

The Pound rose one cent against the dollar, to $1.585, immediately following the data release.

Volatile day for Sterling

Sterling may have a volatile day as the Pound gets pushed around by the release of the MPC minutes from the last meeting and the long awaited public spending review, which will be presented by Chancellor George Osborne at lunch time. Volatile day for Sterling Right on cue, the former has just been released, showing a MPC member (surprise surprise it was Adam Posen) was the only pushing for further stimulus measures (extra QE) and sending Sterling down 30 pips in quick time.

We finally have 3 different views on the committee, 7 voted for no change and Andrew Sentence again voted for a rate rise. We’ve also just seen worse than forecast public finance and public sector net borrowing data no doubt adding to the negative Sterling sentiment.

The Public Spending Review will detail where the axe will fall, right across government departments.

If there are no surprises and the cuts are in line with the plans announced in the Budget, then most of details should already be priced into the market.

However, we are not ruling out a bolt from the blue by Mr Osborne, as this is why the market will be very choppy right for the majority of today.

The surprise interest rate increase by the Chinese helped the safe haven Dollar to gain slightly across the board.

The move can be seen as part of the Chinese government efforts in unwinding the stimulus measures put in place during the financial crisis and also can be seen in the context of the on going ‘currency wars’ as a olive branch to the US.

Eventually the rate rise should see further appreciation of the Yuan against the Dollar.

George’s Axe scything Sterling

Sterling weakened against both the euro and the dollar yesterday ahead of Chancellor George Osborne announcing details of the coalition government’s spending cuts to tackle Britain’s record budget deficit.George's Axe scything SterlingThe Pound fell against 13 of its 16 most-traded peers as some investors speculated the Chancellor’s cuts will not reduce the deficit at the required pace.

With Bank of England policy makers split on whether to raise, maintain or withdraw stimulus, former MPC member Blanchflower expressed concerns of a renewed recession during an interview yesterday.

He stated that the UK is “desperately in danger of a double dip and the last thing you need to do in a recession is make things worse”.

He went on to suggest that stimulus expansion appears to be George Osborne’s only backup plan to avert the risks associated with the biggest budget cuts in UK history, but “quantitative easing just doesn’t act fast enough” to avert the risks of a contracting economy.

Watch for more GB Pound pressure ahead of the Spending Review tomorrow.

Despite posting disappointing industrial production numbers, the US Dollar continued to gain since Friday’s close, adding further weight to the argument that the market has priced in too much QE2 and the long dollar selling spree has created a market short of USD.

Overnight comments from Treasury Secretary Geithner helped the Greenback recover further ground.

Geithner said “No country can devalue its way to prosperity and that the US will not engage in such practice”.

He added that “He does not see a time in our lifetime when the dollar will cease to be the world’s key reserve currency”. There seems to be more room for the dollar to pull back particularly against the euro as expectations for monetary tightening by the European Central Bank appear excessive.

The interest rate market is pricing in a rate hike by the ECB in Q3 2011 suggesting that investors haven’t fully digested the slowdown in Europe.

US Dollar turns the corner- but only for now on profit taking

The US Dollar made ground over night after better than expected manufacturing data and an unexpected rise in retail sales on Friday. US Dollar turns the corner- but only for now on profit takingThis  has reduced concerns that falling consumer spending may weigh heavy on the economic recovery.

But the US Treasury’s budget shortfall remained in the trillions and the University of Michigan consumer confidence index fell to 67.9 points. Consistent high levels of unemployment (unchanged at 9.6% in September) and increasing initial job claims numbers are contributing to downside pressure.

Overall, the Dollar has spent the last 6 weeks sliding lower on the opinion that QE2 is required in order to firm up the declining US economy.

Ben Bernanke’s explanation on Friday indicated that additional monetary stimulus may be necessary, stating “there would appear… all else being equal… to be a case for further action” in order to “promote our dual objectives of maximum employment and price stability” yet gave no indication on how much, or when.

The USD pared losses and finished the day higher, which suggests the contrast between expectation and reality that can exist in currency markets and questions how much easing is already factored into the price. This in turn could make the Dollar susceptible to sharp rebounds.

The market will now seek direction from the FOMC meeting on November 3rd.

The Pound will be in centre stage this week, with markets watching to see what areas of the economy will be most affected by Osborne unveiling the details of the largest budget cuts in UK history and the release of the minutes from the Bank of England meeting (6-7 Oct) both on Wednesday.

We’ve already seen reports from the Centre for Economics and Business (CEBR) suggesting the Bank of England will expand its stimulus program by £100bn to boost the economy as growth begins to contract and austerity measures begin to curb spending.

They also stated that the central bank will keep its benchmark interest rate at a record low of 0.5% until at least “late” 2012

Expect some more significant volatility in currency markets over the week as central banks look to talk their recovery prospects up and their currencies down.

UK GDP growth unchanged at 1.2%

The latest GDP figures for the UK were released this morning showing a rise of 1.2% QoQ for the 2nd month in succession leading to a strong start for Sterling against its rivals. UK GDP growth unchanged at 1.2%The leading indicator of economic health also illustrated an increase of 1.7% YoY painting the picture that the UK economy is steadying and looking at sluggish, but stable growth.

The news has kept the Pound above 1.58 against the Dollar, but also seen it bounce back over 1.18 in trading vs the Euro.

This has also been on the back of comments from the IMF and the Bank of England.

Firstly, the International Monetary Fund endorsed Chancellor George Osborne’s deficit reduction plans stating that the UK was “on the mend” and added the plan “greatly reduces the risk off a loss of confidence in public finances and supports a balanced recovery”.

Secondly, BoE Deputy Governor Charlie Bean said the central bank wanted households to “spend more rather than save”.

The Euro has taken a small hit this morning as Moody’s announced it was slashing the ratings of Anglo Irish’s debt, unnerving investors as Dublin tots up the final cost of rescuing the lender whose loans have crippled the Irish economy.

Government bond spreads between Germany and the struggling nations of Europe have widened again leading to more fears over the Eurozone debt situation.

Eurodollar is down a cent, which will bring relief to all exporters to the US as the pairing runs up against stronger resistance; it has been sitting on 5 month highs.

Money markets continue to be boosted by Basel

Global banking stocks are on the rise again today as regulators announced details of the Basel III accord.Money markets continue to be boosted by BaselProposals include raising the minimum core Tier 1 capital level from 2 to 4.5 per cent with a subsequent 2.5 per cent require as a buffer against future shocks, which is to act in a counter cyclical manner in the sense that Banks will set aside the money when the going is good.

Large British banks already meet the capital benchmarks comfortably, RBS, Lloyds Barclays and HSBC all have core Tier one ratios of around 9-10%, but the announcement will spark a fresh round of capital raising in the worldwide banking sector.

Deutsche Bank has announced it will tap shareholders for cash to pay for it’s acquisition of retail bank Deutsche Postbank and to bolster its own capital position, expect this to be the first of many over the next few months.

The announcement has signalled risk-on (at least for today) and Sterling is gaining against the safe haven currencies of the Dollar and Yen.

The gain in the Pound today look likely to be short lived, with the Chancellors controversial budget cuts sparking union discontent and threats of co-ordinated strike action across the country.

George Osborne detailed further reductions in the welfare budget, amounting to £4 Billion, but he gave no details on where the axe may fall (this is on top of the £11 Billion of cuts announced in the emergency budget in June).

The strikes would see disruption to the economy on a scale not seen for many decades and will be heavily Sterling negative – this will be on top of the effect on the Pound of a reduction in growth levels when spending cuts begin to take effect.

UK banks making huge half year profits- whilst restricting lending

George Osborne has said that banks must increase lending to businesses rather than boosting bonuses and dividends now that they have weathered the worst of the credit crisis. UK banks making huge half year profits- whilst restricting lendingBritain’s Treasury chief said that banks “have an economic obligation to assist” small and medium-sized businesses.

The statement comes in line with half-year figures released this week that are expected to confirm that the major institutions have returned to profit after two years of turmoil.

Lloyds Banking Group, which is 41% owned by the taxpayer, and the 84% state-owned Royal Bank of Scotland are both expected to post a profit. But Osborne questions the ability of British businesses to raise credit from the banks.

“The danger is that, particularly next year, when there is a huge amount of refinancing required, that the small and medium-sized businesses suffer from a lack of access to working capital,” he said.

Osborne continued that British banks “are in no doubt that the government wants to see reasonable access to credit on reasonable terms in the small to medium-sized business sector.”

The expected bank profits have boosted the recent Cable rally and we are now trading in the 1.58s and well on track to the key 1.60 psychological level.

New UK budget boosts the Pound

Chancellor George Osborne’s produced the toughest Budget in a generation yesterday with Britain facing drastic cuts of 25% to government departments.
New UK budget boosts the Pound
The exception will be those departments with “protected budgets,” such as the National Health Service and foreign aid.

Other key take outs include an increase in the VAT from 17.5% to 20% from January next year and a new £2 billion levy on the banks.

The budget reveals a more rapid fiscal response than that planned by the previous Labour government. The Chancellor said, “This emergency budget deals decisively with our country’s record debt.”

The budget also found support from Fitch, the rating agency, who stated the budget “…sets out an ambitious deficit reduction path that, if delivered upon, will materially strengthen confidence in UK public finances and its ‘AAA’ status.” The Office for Budget Responsibility cut it’s economic growth forecast to 1.2% this year and GDP growth next year has been cut to 2.3%.

The news provided further support for Sterling yesterday as it rallied against the Euro and the Dollar. Pre-budget we were trading GBP/EUR 1.1960 and GBP/USD 1.4730, the markets view this as a credible plan and we currently sit at 1.2139 and 1.4924 respectively.

Over in the US and existing house sales numbers were below par despite the continuing tax incentives for the housing market. Although we saw little reaction in the currency markets, (EUR/USD currently sits at 1.2279 from a high of 1.2320 yesterday) equities did sell off at the close leaving a weaker outlook for stocks across Europe and Asia.

Coalitions Osborne sharpens his axe

Sterling held steady yesterday as the reintroduction of a star chamber to quiz ministers on spending decisions marked the start of the Government’s formidable challenge of reducing its £156 billion budget deficit.Coalitions Osborne sharpens his axeThe last time a star chamber was in use was under Margaret Thatcher, but even she did not face cuts of the scale that now face George Osborne.

To maintain a triple A rating, Britain must cut £92 Billion (or roughly the annual NHS budget) over the next five years according to the credit rating agency Fitch, and Mr Osborne made it clear to MP’s yesterday that the role of the State is about to change significantly.

Social security payments, tax credits and public sector pensions are likely to bear the brunt of any cuts, which may end up being as high as 20 per cent. Mr Osborne cited the example of Canada, which faced similar difficulties to the UK in the 1990’s, but successfully turned a large budget deficit into surplus by strongly challenging ministerial spending decisions.

What he failed to point out was the Canadian restructuring was achieved in a period of strong world growth with foreign demand able to replace government spending. We are certainly not in this situation now, and we are far from a consensus over whether current fiscal tightening will put Britain back on the long term path to growth or tip the economy back into recession.

This uncertainty is reflected in the markets; Sterling is treading water in the run up to the Bank of England meeting tomorrow and the Emergency budget on the 22 of June.

The Euro broke the physiologically important 1.20 level against the Dollar on Monday and continues to trade weakly against all the major currencies.

This morning there are reports that Spanish banks are having difficulty accessing funding in the European interbank markets, an ominous sign if true.

The contagion from Eurozone members to periphery nations continues to spread with Hungarian Ministers stating their economy was left in a perilous state by the previous government, sparking significant price action in the Florint-Swiss pair.