Trick or Treat?
A prank gone awry saw the Beeb making boobs of themselves this week as an outraged public failed to share the joke with Brand and Ross. While the moral integrity of those two could be found skulking around with Sterling, which plunged again this week, the late and heavy handed response has seen the BBC come under fire as well. Ah proof perhaps, that good taste is the enemy of creativity. At least George Osborne will be breathing a sigh of relief he has slunk off the front pages in favour of the next ‘gate' to grip the nation. The point is though, that markets are out of the headlines as relatively stable bearish trends replace the fireworks we have seen in recent weeks.
To quickly recap, conservatism reigned early in the week as a steady stream of negative economic data led investors to hoard Dollars. Higher yielding Sterling touched on 1.52 as a strong US Dollar, Yen and Swiss Franc dominated markets. The Bank of England Financial Stability Report (an oxymoron if ever I heard one) pitched the cost of the financial crisis at $2.8 trillion and UK Consumer confidence dropped to its lowest level since 1974. Brown pledged to increase government borrowing to stave off the worst of recession, realigning debt as a proportion of GDP when recovery begins and Boris appeared on stage at Westfield urging the public, to spend spend spend their way out of recession.
Midweek equities recovered, with ironically, the tipping point being low consumer confidence in the US. After the lowest recording since records began, the Federal Reserve was galvanised into a 0.5% interest rate cut and Bernanke's accompanying speech signalled the Fed would go as far as necessary to relieve credit conditions. Hong Kong, China, Norway and Japan also slashed interest rates while in the UK Blanchflower criticised his MPC colleagues for not reducing rates earlier. The Federal Reserve also made $120 billion available to South Korea, Mexico, Brazil and Singapore for immediate finance and found domestic favour with a reported $500 billion mortgage guarantee plan to halt the rate of repossessions in the US.
Markets rallied significantly following this news, with the renewal of risk appetite leading to gains for Sterling at the expense of USD, Euro and Yen. The Dow Jones grew 10%, its second largest one day gain on record, and equities across the world recovered. Further gains were made on Thursday, making the 3 days the longest upward trend in 3 months - “legs to run on rather than the bounce of a dead cat!” frothed one excited economist.
Mixed news has come from the Eurozone this week with Deutsche Bank posted surprise profits, albeit due to a gerrymandering of the write down rules, and German unemployment rates defying predictions by declining for the fifth consecutive month. UK house prices declined by 14.6% on average and Shell and BP posted whopping profits this quarter - 71% and 148% respectively prompting Darling to call for a reduction at the pump, pronto. The Icelandic airline, ominously entitled Sterling, went bankrupt and Hungary became the first EU member state to receive IMF funds to stabilise its volatile economy. Having suffered 20% declines in the last month, Hungary received £15 billion worth of assistance from the IMF, World Bank and EU, a move that was significant for illustrating the extent to which the Euro will support such currencies. Wide ranges remain a feature of the Eastern European currencies with Polish Zloty ranging from 4.516-4.928 against the Pound and the Forint between 323.470 and 349.063.
This morning news of a 0.3% contraction in US GDP for quarter 3 has seen risk aversion rise again and hands are likely to remain hovering over panic buttons. Bearish trends are likely to continue in the presence of a steady stream of recessionary data and economists are predicting a final downturn for markets before the year is out with recovery taking shape over spring 2009.
US data and policy continues to lead the markets with no major announcements until the Presidential Election on Tuesday next week and the Bank of England and ECB interest rate decisions on the 6 November.
Speak with your dealer for advice on the latest market data and how this will affect your investments.