Give me an S!
This week began with a highly international flavour as Chinese New Year, Australia Day and an Indian National Holiday all coincided on Monday making trading was thin on the ground. However, rather than exacerbate woes for the Pound, Sterling staged a significant rally spurred on by a minor recovery in confidence in the banking sector. Give me an S!
After Barclays announced they would still be making a post write-down profit in 2008 and would not need a bail out thank you very much, shares in the bank staged a whopping 75% recovery. Not quite tall buildings in a single bound but highly impressive nonetheless and indicative of what a little confidence can do…. Give me a T! Now if we could just get the cheerleading squad into the HQ of RBS we could be alright.
The Monday morning rally was followed by 3 magical days of gains in global equity markets, giving the Pound and beleaguered currencies everywhere the chance to gain some lost ground. Extreme risk aversion faded, allowing Sterling to gain a foothold on a much stronger trading platform, above the 1.4 level and up from the 23 year lows we saw against the US Dollar last week. At close on Thursday the Pound was trading at 1.43 versus the US Dollar and 1.09 against the Euro. However government debt currently running at 10% of GDP, is likely to continue to be a thorn in the side of Sterling, capping its potential in future.
While negative domestic data has continued to flow, markets have been routinely discounting bad news and this week the focus has been on macro-economic events. The World Economic Forum began its meeting in Davos, Switzerland and the IMF issued its revised growth forecasts for 2009. The IMF expects the UK to be hardest hit by recession with a 2.8% contraction expected in 2009. The German economy is also expected to contract by 2.5%, Japan by 2.6% and the US by 1.6%. The IMF also cited the ‘pernicious feedback loop' linking financial markets and the wider economy, reiterating that recovery in the financial sector is key to wider economic stability.
Redundancies have also been big news and a separate report from the International Labour Organization this morning put world wide job losses at 50 million. Corus has announced 2,500 redundancies in the UK while Royal Dutch Shell, Europe's largest oil company posted its first quarterly loss in 10 years on the back of lower oil prices and reduced demand due for the commodity.
In the US, the House of Representatives passed an $820 billion rescue package which now faces approval in the Senate. Worryingly, the bill received not an iota of Republican support in the House potentially compromising its viability in the Senate. The FOMC left base rates unchanged as expected and reiterated focus on purchasing assets to aid the recovery of credit markets. The Washington Post consumer confidence survey reported record lows.
The Eurozone remains an enigma. We know the situation is getting worse, latest figures confirm it. Yet despite this, consumer and business confidence is up with Sweden joining Germany and France in the rising index this week. On the downside, German unemployment has risen, up to 7.8% with 56,000 jobs lost in December as global contraction takes its toll on the export led German economy.
Volatility has reduced between the European currencies and the Pound. Against the Polish Zloty, Sterling fluctuated between 4.70 and 4.63 this week, greatly reduced from before the New Year. Reports suggest Poland may have slipped into a ‘technical recession' this week as Eastern Europe is beginning to be affected by a downturn in trading partners. The IMF also predicted a 0.4% slump across Eastern Europe.
In other markets the Aussie and Kiwi Dollars benefited from equity market rallies and firmer commodity prices early in the week. The RBNZ decision on Thursday to cut rates by 1.5% to the lowest level in history sent the Kiwi to its lowest level since 2002 against the US Dollar. The Yen has weakened from recent highs with the return of risk appetite. Economic conditions continue to deteriorate in Japan, at odds with the strength of the Yen.
And finally there are still great opportunities to be had when it comes to spot deals. This week was a perfect example as Sterling sunk to 1.36, its lowest level in 23 years against the Dollar. If you need to exchange currency in the future contact your dealer to set up a limit order so you know these spikes will not be missed. Lock them in on a forward contract and you'll be laughing in years to come!
Have a good weekend.