Risk aversion on the rise
Pound Sterling - UK Markets
The pound has declined 1.4% and 0.5% on the yen and the US dollar respectively as the two major safe haven currencies have received a boost with the outbreak of swine flu. The pound has gained on the Australian and Kiwi currencies as appetite for risk diminishes while uncertainty in markets grows.
The FTSE 100 declined over 1.4% in early trading this morning as fears over a swine flu pandemic led investors to dump stocks in travel and tourism. Shares in airlines and travel retailers suffered on the assumption that recession and fears of a pandemic would result in substantially declining travel figures. UK oil giant BP has posted a 62% drop in profits from this time last year as the price of crude has fallen from USD147 to USD50 a barrel. Mortgage approval figures from the British Bankers' Association weakened in March by 26 100 squashing hopes that we could be seeing green shoots in the housing market. The CBI Distributive Trades Survey is due today, on a day that is otherwise light for UK data.
US Dollar - US Markets
The dollar has climbed this morning against most of its major currency partners with the exception of the Japanese yen as swine flu and the pending results of stress tests on US banks weigh on global markets. The dollar is currently trading above 0.76 on the euro and 0.68 on the pound.
Bank of America and Citigroup shares plunged yesterday following a report from the Wall Street Journal showing the banks would need to raise billions of dollars to cover losses incurred during the credit crunch. Bank of America shares declined 7% while Citigroup lost 5%. In combination the banks have received USD90 billion of Federal funds. General Motors this morning has proposed ceding half of the company to the government as it struggles to avoid bankruptcy. Currently GM is crippled by debt and faces a 30 April deadline for restructuring in an attempt to become financially viable. US consumer confidence is out today with crucial first quarter GDP figures released tomorrow.
Euro - European Markets
The euro has lost its momentum of the last few days, falling to below 1.3 on the US dollar and 0.90 versus the pound as uncertainty surrounding quantitative easing and swine flu pressure the single currency.
Yesterday ECB President Trichet signalled the ECB would use quantitative easing if necessary, with an announcement to be made on the 7th May. Recent debate from ECB members over how best to proceed with quantitative easing are weighing on the euro as the economic situation in the eurozone continues to deteriorate. Spanish unemployment figures released yesterday showed unemployment has more than doubled to 17% in the last year. At least a ‘moderate' base rate reduction of 0.25% is expected at the next ECB meeting. EMU consumer, economic and industrial confidence figures are due tomorrow.
Other Currencies - Highlights
Asian indices suffered overnight on fears of swine flu with Japan's Nikkei and Hong Kong's Hang Seng index both losing ground. Shares in China Southern Airlines also shed 15%. The yen has strengthened due to the global rise in risk aversion, even more so than the US dollar as GDP figures and results of stress tests concern US markets. Japanese retail sales figures released yesterday showed a 1.1% contraction in March, putting them in decline for the sixth consecutive month. Many of the exotic currencies reliant on tourism and trade have been pushed to the lower end of ranges in favour of risk aversion as the combination of recession and swine flu are leading to fears of a reduction in travel numbers. The Aussie and Kiwi dollars both lost ground against sterling and the US dollar overnight. Thursday in New Zealand brings the interest rate decision and markets are expecting a 0.5% reduction in the base rate.