Foreign Currency
Sterling has briefly settled into a new trading range against the dollar, circa $1.84-90. The trading range against the euro has remained virtually unchanged for the past five months, in the region of £0.78-0.8050. Given that both the eurozone and the UK are at similar stages of the economic cycle, this range may hold into the autumn months. The dollar is somewhat more volatile. It is too early to say whether the 7 year bear run in the US dollar (v sterling) has ended, but last week certainly saw a fundamental move in the US currency. There is unlikely to be a significant move in sterling in the early part of this week, but the pound may well ease in the run up to Friday’s UK economic growth (GDP) data. The 0.8% fall in second quarter industrial production is expected to reduce the overall second quarter growth rate to 0.1% per quarter, and 1.5% per annum. This rate would be identical to the second quarter eurozone growth rate year on year.
Interest Rates
Period rates (2 year plus) are marginally higher, whilst 1-6 month rates continue to edge down at snail place. Friday’s 3 month Libor fixing of circa 5.76 % was the lowest since early May, but the level is some 0.50% higher than a neutral 3 month LIBOR rate. This clearly shows the strength of the credit crunch. The short term outlook for period rates is one of relative stability. The MPC Minutes will be published this week. Both the content and voting balance will be of interest. The balance between the votes for an unchanged base vote and an increase / decrease will provide a strong clue to the timing and direction of the next rate move. Given the Bank of England’s central forecast view that CPI will be just below target on a 2 year view, our current view is that the next move in base rate will be down. The Bank of England central forecast that growth will be close to zero until mid 2009 indicates that base rate is unlikely to be reduced until there are clear signs that the rate of inflation is on a clear downward trend, probably in the first quarter of next year.
Equities
Overall, global equity market sentiment was neutral last week, indicative of the current consolidation tone. US markets closed the week on a positive note, up on the day but still down in the week, following a 0.2% increase in July US industrial output. This figure, combined with the first signs of recovery in the housing market and the 1.9% (annualised) increase in economic growth in the second quarter suggests that the US economy will probably avoid a recession.
Oil and other commodities
Brent crude (1 month forward) rose to about $114 a barrel ending 3 days of falls. Prices have risen following the evacuation of oil rigs in the Gulf of Mexico due to the approach of Tropical Storm Fay.