Overpaid, who me?
It seems the English sportsmen are doing a good impression of the UK economy this week. With the abysmal performance in the West Indies last week and the friendly against Spain on Wednesday, perhaps overpaid and ineffectual are adjectives not confined to those operating solely in the banking sector….
This week we have seen more of that notorious market volatility as uncertainty and nervousness are seeing traders abandon long term positions in favour of short term gains and traditional safe havens. Mervyn King's statement this week, that growth prospects remain “unusually uncertain” sum up market sentiment for not only the UK, but the world as no one is sure what the length and breadth of this recession will be.
This week has seen a return to risk aversion wiping the cautious gains made by Sterling and the Euro in previous weeks. Negative economic data has dampened investor confidence but the major influence on market sentiment has been the underwhelming rescue package from the US Federal Reserve. The eagerly anticipated package was expected to provide blueprint for recovery in the world's largest economy. However details of the plan, announced by Treasury Secretary Geithner early in the week, were deemed to be light on specifics and failed to inspire market confidence.
What everyone wants to know is: how to stop banks failing, how to alleviate toxic debt, and how to stimulate property and credit markets. Simple, right? Apparently not. The failure of Geithner to address these issues, combined with the news that the Senate had passed a ‘nipped and tucked' $789 billion version of the original rescue package, meant market response was tepid at best. The Standard and Poor's actually declined 4.9% and crude oil fell back to $45 a barrel on the back of market unease.
As global equities take their cues from US markets, this luke-warm reception affected currency exchange rates via a return to risk aversion. The Pound, Euro, European and Australasian currencies all suffered in favour of the traditional safe haven Yen, US Dollar and Swiss Franc. Of concern to economists now is that a drop in confidence at this early stage could sabotage the entire package.
For Sterling, this increase in risk aversion combined with negative domestic news knocked the Pound off the pedestal it has occupied in recent weeks. Unemployment is up to 6.3%, soon to hit 2 million and Bank of England Governor Mervyn King predicted the economy will contract 4% in the first quarter of 2009. Sterling fell to 1.10 versus the Euro and 1.42 versus the Dollar. King also hinted at further monetary easing which with interest rates at 1%, presumably means quantitative easing is still an option for the Bank. This is a strategy fraught with risk and added uncertainty is depressing the Pound.
Results for the Euro have been mixed this week, gaining on the Pound to 0.90 yet broaching a two week low of 1.28 against the Dollar. Credit Suisse and Peugeot posted major write downs for the final quarter of 2008 and this dragged European equities lower. The Credit Suisse news is significant in that the bank managed to avoid the worst of the sub-prime crisis, yet still suffered massive losses to its investment arm in the wake of the Lehman shocks.
The IMF has predicted the Eurozone economy will contract 2% in 2009 and Sweden's Riksbank reduced their base rate to 1% this week. French President Nickolas Sarkozy is coming under fire from EU leaders for his economic nationalism which is at odds with the spirit of the EU and many economists are regarding recession as the true ‘litmus test' of the Euro. Poland may cut the minimum reserve levels for it's major banks as the economy continues to be battered and interest rate reductions have devalued Zloty.
We are still in a stage where no one knows how long recession will last, how bad it will be and which are the best steps to take. Predictions are still subject to routine revisions and it has been evident this week that risk aversion is still the dominant force in international markets. With global markets looking to the US for cues, the diluted Federal Reserve announcements have refreshed uncertainty throughout the world. This is fuelling volatility as the flight to quality means short term positions are being favoured over long-term ones. Information and timing are still your best bet when it comes to making viable trades and with that in mind get registered with Currency Solutions and take advantage of those spikes when they occur.
And lastly I am doing a skydive on the 28th of February for Global Angels, an international children's charity. The nerves are growing so I am in need of support…..and donations! Every penny goes straight to charity and your support is greatly appreciated. To donate click here.
Thanks have a great weekend!