Crisis Lowers Confidence
If global markets could have followed the advice given to Lewis Hamilton in his bid to gain the world title in Brazil, to “drive a tactical race and keep out of trouble” we may have been in a different position at the close of this October week. Investors however, like Hamilton, don't respond well to criticism and the raft of negative data has meant equity markets have remained notably bearish as the global economy braces itself for widespread recession.
Despite opening strongly, “on the path to normalization” trumpeted Trichet, recessionary fears in developed economies and flight of capital from emerging ones have further destabilised the international credit scene. Sterling has come under significant pressure in reflection of domestic discord and widespread volatility is affecting all major currencies. Only the US is experiencing strength at present, as the flight to quality investments rewards the Dollar's safe haven status.
A barrage of significant data has been released this week with central banks taking centre stage. RBNZ has slashed interest rates by a full 1%, Canada by 0.25% and Sweden by 0.5%. In a reversal of this trend the Danish Nationalbanken raised their base rates by 0.5% in an effort to retain foreign investment. The Federal Reserve's next decision is on the 29 October with the Bank of England and the ECB to follow on the 6th of November with further rate cuts likely to stimulate the international economy.
In the UK Government borrowing soared to £8.1 billion in September, up from £4.9 billion in September 2007. At 37.9% of GDP Britain may need to take a loan from Beckham himself to stave of the debt that is juggling the fiscal golden rules like a pair of golden balls. Midweek, Governor King spoke of imminent recession in the UK, noting that recent events have been the biggest threat to the economy since WW1 with a ‘long march' to economic recovery ahead. As you can imagine, this was hardly the pep-talk Sterling needed and triggered a tailspin of selling which saw the Pound decline to a 16 year low against the US Dollar. Ranges this week have again been spectacular with Sterling fluctuating between 1.75 and 1.60.
G Brown chimed in to the recession chorus the next day, and although careful to sugar-coat the news with the swathes of other countries also facing recession, this still proved a bitter pill for markets to swallow and Sterling again declined against its major currency partners. Retail sales data for September came in at 1.8% taking annual growth down to 2.3% and the unanimous MPC decision increased speculation of a further base rate cut in November. On the positive side, LIBOR rates fixed at 6.04% on Thursday, the lowest in 4 weeks indicating interbank lending is beginning to thaw and BBA mortgage approvals were ahead of predictions for September.
Internationally the Euro is holding relatively steady, boosted by the news that Nestle and Sygenta, the world's largest food and agricultural chemical manufacturers (is anyone else disconcerted by that combination?) posted annual profits of 4.5 and 3.7% respectively. The IMF is now fielding calls for assistance from a number of developing economies struck by the credit crunch. Pakistan is the latest applicant for a £3 billion loan to service international debt. The IMF is predicting world economic growth will grind to a halt in 2009 with a slow recovery thereafter.
Currency markets have continued with their erratic tendencies this week. The US Dollar, despite being at the crux of the global downturn, has strengthened due to its safe haven status and repatriation of capital flows. Widespread risk-aversion has had a highly destabilising affect on emerging economies and particularly some of the Eastern European currencies. Against the Pound, Zloty in the last 7 days has ranged from 4.59 to 4.88 and Hungarian Forint between 342.903 and 356.726. The Yen and Swiss Franc have served as reliable barometers of global risk appetite and the value of Sterling remains anchored by domestic conditions.
At the risk of sounding like a stuck record, trading environments remain highly unpredictable. Forecasts are difficult to make but bargains are there for those in the know. Don't be complacent!
Have a good weekend.