Wish you weren't here
If you are cutting back on costs because of the credit crunch, spare a thought for guests at the Cromwell Crown Hotel in Earl's Court, dubbed ‘Britain's worst hotel' this week. “Awful - thought Jack Nicholson was going to burst through the door" wrote one blogger of the reportedly terrifying dive. A holiday staycation? Perhaps not…
This week markets followed the now familiar theme of losses followed by rallies followed by more losses as market confidence suffered further hits in a climate driven by risk trends. Friday last week brought the announcement that US GDP contracted at an annualized 6.2% in the fourth quarter of 2008. This was a much steeper decline than expected and was accompanied by a 4.3% drop in retail spending. With rumours abounding of a potential nationalisation at AIG, equity markets went into a tailspin, fuelling a rise in risk aversion around the world.
Needless to say markets opened on a distinctly negative note this week. This was exacerbated by the fact that AIG posted a whopping profit loss of $61 billion, the largest in corporate history or $28 million an hour, putting the meaning of ‘loss' in an entirely different stratosphere. Following this announcement AIG received a further $30 billion in Federal funding taking taxpayer ownership to 77.9%. The Dow Jones and Standard and Poor's plummeted 4.2% and 4.7% respectively and market declines were felt around the world from Tokyo to London.
Wednesday saw a slight recovery in equities, followed by a rally in currency exchange rates although speculation over the pending ECB and Bank of England interest rate decisions capped the value of Sterling and the Euro when trading against the Dollar.
Thursday brought the interest rate decision which was in line with market predictions as the MPC and ECB both cut 0.5% from their base rates. This took interest rates to new record lows of 0.5% and 1.5% respectively. Having exhausted the interest rate option the UK is now looking towards quantitative easing to stimulate the UK economy. Rather than switch on the printing presses, quantitative easing allows the Bank funds to buy up bad debts and in theory, restore consumer and interbank lending to normal levels. The added uncertainty of how this will affect the UK economy is weighing on Sterling exchange rates.
The economic situation continues to deteriorate in the US with the private sector shedding 697,000 jobs in February. Timothy Geithner stated this week that the US slump is deepening with little hope of recovery in the near future. Government decisions in the US continue to wield a disproportionate amount of influence over the global economy as economic health in the US economy is crucial to global recovery. Within the US, the size and scope of AIG means the company itself is crucial to the health of the financial sector and in this sense, the entire global economy. Hence the government decision to broaden rescue efforts and provision of further aid this week.
The Euro remains under pressure as this situation continues to deteriorate in the Eurozone. Despite the 0.5% rate reduction, market perception is that the ECB is behind the curve when it comes to fiscal policy. Economic statistics in all the major economies continue to deteriorate and the situation in Eastern Europe is highly uncertain. Banking sectors in Eastern and Central Europe are to receive 24.5 billion from international organizations including the World Bank to help them weather the economic crisis. The ECB is currently considering a proposal to accept securities from Eastern European banks in local currencies and this could help the likes of Poland and Hungary who are currently suffering unfavourable exchange rates against the Euro.
Elsewhere the Australian Reserve Bank somewhat surprisingly opted to leave interest rates unchanged at 3.25% and GDP contracted -0.5% in the fourth quarter of 2008 taking annual growth to 0.3%. The Bank of Canada cut interest rates to 0.5% and this sent the CAD to touch on three month lows against the US. Chinese Premier Wen Jiabao announced a $585 billion economic stimulus package for China and this bolstered Asian equities with renewed enthusiasm.
For the moment risk trends remain the driving force in the international economy and currency exchange rates continue to shadow market trends. The cable rate seems to be treading a channel between 1.4 and 1.42 while the Pound remains in the vicinity of 1.11 against the Euro. Zloty is battling with a weak currency and a 34% drop in banking profits and Eastern Europe is being regarded with caution by investors and insures while instability is a feature of international markets.
Fears of institutional failure still abound and talk of ‘global recovery' is being peddled by Gordon Brown, provided the Federal Reserve does all the work. Uncertainty is likely to continue to cloud Sterling while quantitative easing remains in its early stages and risk trends are supporting the Dollar, Yen and Swiss Franc. The Eurozone continues to deteriorate and the ECB is fraught with logistical nightmares when it comes to creating economic policy. Volatility also remains a feature of the marketplace and is likely to continue to do so in the short term until we see an upturn in growth trends. Keep yourself informed by speaking to your dealer!
Have a good weekend.