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Review of the Day 11/02/2009

Posted by chrisdshaw in Uncategorized.

Markets continued to demonstrate risk aversion today, following uneasiness about the lack of details about the bank rescue plan announced by US Treasury Secretary Geithner. The yen was the chief beneficiary of this trade, with sterling the most punished. The UK currency’s performance recently has been closely correlated to bank stocks. This week’s focus on the banking sector, together with a dismal assessment of the UK economy, has weighed heavily on sterling which today saw a fall of over 1% of its value against both the USD and the EUR. The BoE’s King said that the UK economy was in a “deep recession”, predicting that GDP could fall an astonishing 4% in the first quarter of 2009 alone.  King indicated that the BOE would pursue a zero interest rate policy, as well as initiating quantitative easing. GBP had rallied earlier on better than expected jobs data (73K compared with the consensus forecast of 89K).  This followed yesterday’s sharp fall following the Geithner announcement.

The lack of clarity by the Obama administration on how best to make banks, and hence capital markets, fully function has depressed the market which had been counting on a decisive announcement. The market rallied last week- “buying the rumour”. However, yesterday and today’s price action has been about much more than “selling the fact”. Geithner’s admission that the administration has still not worked out how to price the toxic assets disappointed many market participants, who were encouraged by Obama’s sense of urgency a few days earlier. 

Elsewhere, the Swedish Riksbank cut rates by 100bps, versus the market expectation of 50bps; underlying the deteriorating economic picture the world over. The CAD was little changed against the dollar despite Canada posting it’s first trade deficit since March 1976. The market has been increasingly bullish on the outlook for commodities as the very aggressive stimulus package in China is expected to help demand pickup in the second half of 2009.


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