Foreign Currency
Sterling is almost 1% higher against the euro and over 1% lower versus the dollar. This continues the trend of the past few days. The tide may well have turned in favour of the US dollar. The most recent growth statistics suggest that there has been a gradual upturn in the US economy since the fourth quarter of 2007. American financial sector results, on average, have been less negative than anticipated. The origins of the international credit crunch were the problems in the US financial sector. Whilst there is likely to be a very substantial volume of negative economic and company news in the next few weeks, the longer term outlook for the US economy is more positive than at any time since mid 2007. The next move on US federal funds rate is likely to be up, although we do not anticipate a change until the first quarter of next year.
Interest Rates
Period rates are virtually 0.1% higher in the run to this week’s large volume of UK economic data. The rise reflects the upturn in US and Japanese stock markets in response to lower commodity prices. UK economic news continues to be negative. The most recent housing market data shows a sharp rise in mortgage repossessions, albeit from a relatively low base. Inflationary pressures in western economies appear to be easing, as evidence by the 2% plus rise in US productivity. Whilst the next move in the US benchmark interest rate is likely to be an upward move – albeit from a low base, the next move in UK base rate may well be a downward move. There could be a significant degree of volatility in period rates this week. There is very a substantial volume of UK statistical releases plus publication of the Bank of England’s Quarterly Inflation Report. It is expected that the Bank of England will make a significant upward revision to the short term forecast and a significant downward revision to the short term growth forecast. The revisions to the growth and inflation forecasts on a 2 year horizon are likely to be less pronounced.
Equities
US and Japanese equity markets closed the week on a positive note, whilst the majority of leading European indexes were also higher on the week overall. The rally primarily reflects the decline in oil prices.
Oil and other commodities
Brent crude (1 month forward) has continued its downward momentum, falling below $115 / barrel. This reflects the resumption of supplies via the Caspian – Turkish pipeline.