Foreign Currency
Sterling is between 1% and 2% higher against the dollar and euro following the G20 meeting, which highlighted the problems of the global economy in general. The consensus market view remains that the underlying trend in sterling is downward. The UK is experiencing its sharpest economic slowdown since the early 1990’s. The UK economy is badly positioned for the current downturn given the high rate of inflation, the limited room for manoeuvre on fiscal policy and the importance of financial services and overseas trade in the UK economic structure – the two sectors which are suffering most from the international credit squeeze. UK growth is likely to remain in the region of minus 0.5% per quarter until the spring, by which time the cumulative effect of interest rate reductions should start to impact on the global economy.
Interest Rates
Period rates are marginally lower. This morning sees publication of UK inflation data. The consensus forecast is for a fall in all the key measures of inflation – CPI, RPI and RPIX (RPI less mortgage interest), which is the most accurate indicator of inflationary (and deflationary) forces in the economy given that it includes a significant housing market element. The MPC target is CPI, and if there is a significant fall in the annual of CPI today (a reduction of circa 0.5%), this would increase the probability of a 1% reduction in base rate next month. Tomorrow sees publication of the MPC Minutes which will provide a clear indication of the rationale for the 1.5% base rate cut. One key factor was probably the high differential between base rate and LIBOR – an international phenomena which is a barometer of the strength of the international credit crunch. Liquidity in financial markets is improving at a very slow pace. There was a modest fall in UK short term rates yesterday. 3 month LIBOR fixed at 4.14875%.
Equities
Equities opened the week on a negative note. Following the G20 meeting, the focus is on the downturn in the global economy. The main thrust of G20 is a significant fiscal policy stimulus. Investment managers will need to see concrete proposals re fiscal policy initiatives before re-adjusting asset allocation between cash and equities. There was also a G20 reference to completion of the Doha round of trade talks. If successful, this could provide a major boost to world trade but to date Doha diplomatic rhetoric has not been matched by concrete agreements.
Oil and other commodities
Brent crude (1 month forward) is broadly unchanged in the region of the region of $52-55/ barrel.