'We are enjoying sluggish times and not enjoying them very much'
As recession wraps its clenched fist around the world, enter President Obama. Global messiah, patron saint of overextended capitalism, the world has high hopes for the 44th President. Let's hope his policies are as good as his dance moves!
In a week that began with blue Monday in the UK, the relentless winter of discontent continues. Sterling is in a very bad way, trading at 1.35 versus the US Dollar and 1.05 versus the Euro, battered on all sides by a lack of faith in the financial sector and the government's ability to handle it.
The week began with RBS posting a £28 billion profit loss. As the largest corporate loss in UK history, it was the straw that broke the camels back. Shattering the tentative market confidence that had previously existed, the announcement sent RBS shares plunging 67%. The fact that Wall Street was closed for Martin Luther King Day and the FSA had recently lifted the ban on short selling exacerbated the impact on Sterling which plunged to 6 year lows against the US Dollar. Five days on and the Pound still hasn't come up for breath, the saying that Sterling ‘climbs the stairs and goes out the window' has never been more true.
A steady stream of negative statistics has added to the pressure on the Pound. GDP contracted -1.5% in quarter 4 placing the UK firmly in recession territory, unemployment has risen and industrial trends are all heading downwards. Order books are at their lowest level since 1990. The mini ray of light is that inflation is falling and retail sales are up and this is likely to be fodder for further MPC decisions. Minutes from the previous meeting showed an 8-1 vote in favour of the 0.5% reduction, although it seems that this decision was made on the basis of appeasing markets rather than autonomous fiscal policy. The value of Sterling is very fragile indeed.
The UK government is also in trouble, stuck between a rock and a hard place. On the one hand, markets need financial support while on the other, government blank cheques are being viewed as disastrous for Sterling. Uncertainty surrounding asset nationalisation, monetary easing and debt levels are provoking a massive crisis in confidence for the Pound and the second tier of bank bail outs this week has failed to induce a positive response for these very reasons. Cameron's howling that Britain may need IMF assistance has not helped matters and if the UK became subject to the same kind of credit warnings Standard and Poors has been slapping on Greece, Spain and Portugal we could be in for some real trouble. Here's hoping the upcoming G7 meeting will provide some relief. In addition, international risk aversion has seen the Pound breaking out of a well worn path and veering close to unchartered ranges against the Dollar and Euro.
Things have been much more positive on the other side of the Atlantic. An Obama bounce caused a rally in equity markets this week, allowing some of the higher yielding currencies to appreciate. How long this will last, or how much bad news it can withstand, is anyone's guess. Negative economic figures have continued to come from the US yet these have provided back handed compliments to the Dollar in the form of increased risk aversion. The underlying trend in equities remains uneasy as markets await the announcement of an $850 billion rescue package from the new Obama administration. Of particular importance will be the details and delivery dates of the policy.
This week has been light on data for the Eurozone, although the single currency has been back in favour with the return of risk aversion. The Euro has been trading close to record highs against the Pound, although is lower against the traditional safe havens. Chinese GDP has shrunk to 6.8% in the final quarter of 2008, taking annual growth rates to 9%. Although significantly higher than most developed nations, this is the weakest figure in seven years and is indicative of how the financial crisis is spreading throughout the world. Luckily the Chinese year of the Ox who is said to reward hard work and tenacity, is about to begin.
While uncertainty continues to reign, we will continue to see volatility in markets and exchange rates. Risk appetite still remains the guiding principle as investors continue to buy and sell currency based on prevailing economic sentiment. The Dollar has continued to be a source of strength and if you need to change Dollars to Euros or Pounds, now is the time to pick up the phone. Hopefully we can bring some better news next week regarding the fortunes of the Pound…watch this space.
Have a good weekend!