Foreign Currency
Sterling is, once again, higher against the US dollar. This reflects unease over the content and cost of the US financial institution bailout, as opposed to specific sterling factors. Against the euro, sterling is also marginally higher, although the pound sterling remains well within the £0.78- 0.8050 range that has been in place for most of the past six months. The underlying trend in sterling is marginally bullish, reflecting recent gains against the US dollar and a number of commodity exporting countries such as the Australian and New Zealand dollars. The commodity exporting currencies will regain ground once clear evidence emerges of a recovery in the global economy. At present, global growth is approaching a low point in the region of 3% per annum. During the remainder of this week, sterling’s value will be determined by international forces, given the limited volume of key UK economic statistics.
Interest Rates
Longer term period rates (swap rates) beyond 3 years are broadly unchanged, despite the downturn in the equity market and much weaker than expected mortgage lending data from the British Banking Association. The BBA estimates that underlying bank mortgage lending has fallen to an underlying level in the region of £2billion per month net. Allowing for mortgage lending by building societies and other institutions, it now appears that UK total mortgage lending will reach a trough of £2.5 billion in September and October, versus a level just above £3billion in July. Today sees publication of the CBI Distributive Trades Survey, a significant barometer of the UK economy.
Equities
World equity markets are distinctly lower, on uncertainty over the US financial sector bailout. Federal Reserve Board Chairman Bernanke and US Treasury Secretary Paulson both testified to the Senate Banking Committee yesterday. The most likely outcome is that the Paulson proposal will be enacted with a number of amendments, following intense congressional debate. There is, however, a 25% probability of a negative outcome, which could place severe pressure on global equities.
Oil and other commodities
Brent crude (1 month forward) has briefly stabilised in a range circa $100- 105 / barrel. Throughout the coming months, crude oil prices will fluctuate in response to anticipated changes in supply and demand. This reflects the very tight balance in the oil market, Fluctuations will primarily reflect financial market perception over the path of global economic over the next six months – recovery or further retraction.