Talk about fireworks!
What a week. The US has a new President, Britain has a new champion, and Europe has a new um… set of interest rates. I've been exhausted just watching! Since Lewis Hamilton snatched the grand prix from Glock, the excitement has not let up. Obama's fantastic victory in the US restored our faith that, ‘yes they can' get it right when it counts and the world breathed a collective sigh of relief when Palin boarded her plane back to Alaska. Adding to the frayed nerves and general clamour was every second person setting off skyrockets outside my windows. Thank god I got a chance to rest at the thoroughly uneventful Arsenal game midweek. With the score at nil all I might as well have caught up on some sleep!
Markets of course, have been witness to these explosive events. Opening with a sense of cautious optimism, markets have closed with well… a sense of cautious optimism, albeit with some significant movements in between!
The MPC's 1.5% reduction in interest rates yesterday bolstered Sterling internationally. By reducing base rates to 3%, a level not seen since 1955, the Bank signalled a hawkish stance on recession now that inflation is ebbing away. The dramatic reduction was necessitated by the existing differential between base rates and LIBOR and was interpreted positively by markets. Taken in combination with cash injections and lower thresholds for collateral, interest rates are the latest in a 3 pronged attempt to revive the flow of credit which is still holding the global economy hostage.
The ECB also announced a widely expected reduction by 50 basis points to 3.25%. In his accompanying speech, Trichet refused to rule out further reductions, prompting some economists to predict we may see a ‘race to zero' when it comes to interest rates. Now that inflation is generally falling, a reduction in base rates is being seen as positive in fighting recession and reinvigorating domestic economies. The Czech Republic, Switzerland, Denmark and Australia also cut rates this week, by 75 basis points in the case of the RBA and the Czech Central Bank. Again these have tended to be positive for the currencies, with support often coming after an initial sell off period. Such decisions are usually accompanied by a degree of volatility which is inducing large ranges at present. The Czech Koruna ranged between 29.91 and 30.74 against Sterling this week.
More negative data from the UK and Eurozone appeared this week, validating the decision to cut rates. As Q3 economic contraction in the UK has led to higher unemployment, reduced spending and low retail confidence, we saw this manifested in a 34% reduction in profits at Marks and Spencer. House prices fell a record 14.9% on the year in October making the prospect of negative equity a reality for many home owners.
In the Eurozone, Spanish unemployment is up 7.3% in October, now one of the highest in the region. Swiss Banking giants UBS and Credit Suisse reported losses of 59% and 37% from share prices respectively as a result of the credit crisis and PMI's for the UK and Eurozone showed negative growth throughout manufacturing, production and service sectors.
Markets looked favourably upon the election of Barack Obama as the 44th President with the subsequent ‘Obama bounce' strengthening the US Dollar. However, negative economic data has since erased market gains reminding us we are very much in recession territory. The US PMI for Manufacturing reached a 26 year low and losses in private sector jobs were up by 150 000 in October. Brent Crude fell away to the vicinity of $60 a barrel as Saudi Arabia announced production cuts in light of reduced global demand. Even that great icon of American consumption, the automobile industry, is in strife with General Motors having lost $70 billion worth of profit since late 2004. Toyota and Adidas also posted profit losses and suffered declines in equity prices as a result. Deflation is being touted as the next potential problem for the US with house prices in metropolitan Detroit declining 10.5% in quarter 3. This is the largest decline of all US cities, in a state where joblessness is also rising above the national rate.
This morning the IMF has revised global growth prospects from 3% to 2.2% and today the US takes up the position as market driver with the publication of key employment data. Although market sentiment and confidence are crucial at this stage of the game, sustained confidence is proving difficult to maintain while being consistently undermined by negative economic data.
Next week will see the goods trade balance for the UK, likely to bring some pressure for Sterling as well as key employment data. In the US, trade balance and retail sales figures for October are likely to fuel speculation of further rate cuts from the Federal Reserve. We can expect continued volatility as markets digest Obama's stance on economic and foreign policy.
This week the ranges present have illustrated the importance of timing when it comes to foreign exchange. As a general rule of thumb, wherever there are major announcements to be made, volatility will be sure to follow so speak to your dealer for advice on currency trades. They monitor the markets so you don't have to.
Have a good weekend!