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Shining a light on the dismal science

October 14th, 2009

Pity Poor Pound

Posted by: Mike Dolan

Britain's pound has long been the whipping boy of notoriously fickle currency markets, but there are worrying signs that it's not just hedge funds and speculators who have lost faith in sterling. Reuters FX columnist Neal Kimberley neatly illustrated yesterday just how poor sentiment toward sterling in the dealing rooms has become and the graphic below (on the sharp buildup of speculative 'short' positsions seen in U.S. Commodity Futures Trading Commission data) shows how deeply that negative view has become entrenched.              

 While the pound's inexorable grind down to parity with the euro captures the popular headlines, the Bank of England's index of sterling against a trade-weighted basket of world currencies shows that weakness is pervasive. The index has lost more than a quarter of its value in little over two years -- by far the worst of the G4 (dollar, euro, sterling and yen) currencies over the financial crisis. The dollar's equivalent index has shed only about a third of the pound's losses since mid-2007, while the euro's has jumped about 10% and the yen's approximately 20% over that period.

There's no shortage of negatives -- Britain's deep recession, recent housing bust, near zero interest rates and money printing, soaring government budget deficit (forecast at more than 12% pf GDP next year, it's the highest of the G20) and looming general election in early 2010. In the relative world of currency traders, not all of these are necessarily bad for the pound -- the country is emerging tentatively from recession, the dominant financial services sector is recovering rapidly and  short-term interest rates (3-month Libor at least) do offer better returns than the dollar, yen, Swiss franc or Canadian dollar. 

But recent data from the IMF on global hard currency reserves shows there may be a more disturbing exit of central bank reserve managers from the pound (no stranger to process of losing reserve currency status, as its pole position was ceded to the dollar after WWI).  Sterling's share of the almost $7 trln of world central bank reserves -- which are rising sharply again after a brief hiatus due to the credit crunch -- is being steadily eroded. 

Although nominal reserve holdings of sterling (the rise of which prior to the crisis was seen as a powerful supporter of both the currency and gilt market) did rise by more than $10 bln in the second quarter, they remain about $24 billion below the peaks of Q2 2008. What's more, Citi economist Michael Saunders estimates that once you adjust for revaluation effects of currency rate swings, central bank holdings of sterling actually fell in Q2 this year.  He reckons that, accounting for these adjustments, Q2 was the second consecutive quarter of net sterling sales by central banks and that the 4 billion pound drop in nominal sterling holdings was the biggest on record. Saunders concludes:

The huge inflows of global FX reserves into sterling and gilts have played a big role in financing the fiscal deficit in recent years. At present, the fiscal deficit is being wholly funded by the BoE, but sterling remains vulnerable and gilts seem highly vulnerable as and when QE ends.

(Graphs by Scott Barber and IMF/Citi)

September 3rd, 2009

Live Blogging G20

Posted by: Jeremy Gaunt

Finance ministers from the G20 are meeting in London on Friday and Saturday to discuss the next steps in battling the world’s worst economic and financial crisis since the Great Depression.

Reuters correspondents from around the world will be at the event, taking you behind the scenes and and providing unprecedented coverage through this live blog.

September 2nd, 2009

Power shifts from G7 to G20

Posted by: Jeremy Gaunt

Finance chiefs from the G20 meeting in London on Friday and Saturday are likely to be in a slightly better — or at least more relieved — mood than they were last time they got together.

The world economy is still in a mess and the financial system is far from running normally. But — and it is a big but at that — fears of global economic collapse have dissipated. This is in no small part as a result of the actions of groups such as the G20 which endorsed coordinated intervention into the marketplace.

So much so, in fact, that much of this weekend’s discussions will touch on the so-called exit strategies that countries will need to get themselves back out of the stumulus and bailout business. With markets in mind, they are likely to be coy about it.

The G20 itself, meanwhile, is taking on a higher and higher profile as a result of both the global crisis and the rise of China, India and others to economic prominence. In a special report, Brown Brothers Harriman says that the G20 will soon eclipse the G7 as the most important economic policy making gathering.

It argues that it is in the G7’s interest to do so because it stops the solidifying of an emerging market bloc and waters down Russia’s role, following the latter’s now permanent presence as part of an extended G8. 

Here’s an unscientific poll about whether the G20 or the G7 now carries more clout. As ever though, your comments welcome on what this weekend’s meeting should achieve.

August 27th, 2009

Vote here on Japan’s economy and its election

Posted by: Jeremy Gaunt

Britain’s Association of Investment Companies has UK investors who run Japanese equity funds whether they think the general election on Sunday will have a positive impact on the country, which is slowly emerging from recession.

Their answers can be found here, but the consensus was that the Democratic Party of Japan would defeat the ruling Liberal Democrat Party and that this would result in more consumer friendly policy or economic revival through higher living standards.

Managers were more divided on how long-lived any positive impact on stock market would be.

Our unscientific mini-poll below gives you the chance to vote on the issue — but as ever your comments are also welcome.

August 21st, 2009

Recession? It’s all in the mind…

Posted by: Sebastian Tong

Remember that old chestnut about how it’s a recession when your neighbour loses his job and it’s a depression when YOU lose yours?

Well, research carried out by Datamonitor suggests a similar divergence between British consumer perception and behaviour during the current economic downturn.

The survey found that 90 percent of UK consumers believed that the country was in the grip of recession but slightly over half of them (53 percent) said their household finances have either improved or stayed the same. Similarly, twice as many people feel their job is safe as those who have actually lost or fear they will lose their jobs.

In the majority of households there does not appear to have been any significant increase in financial strain that results in consumers displaying recessionary behavior,”

“On the contrary, only 8 percent globally think that their household’s general financial situation has worsened significantly since before the downturn, and thousands have actually benefitted from reduced mortgage repayments, for example.”

Datamonitor said the UK could be in the grip of a “psychological recession”, adding that the term was not meant to trivialise the economic contraction but to illustrate that the knee-jerk psychological reactions of consumers to the threat of recession were “primarily responsible for the perpetuation of the recession.”

Its solution is to…well, look on the bright side.

“The communication of positive messages through the government, the media and the banking industry is what is needed to facilitate a psychological shift and confidence boost amongst consumers, bringing about a ‘Psychological Recovery.”

(An earlier version of this post incorrectly said that Friends Provident had commissioned the Datamonitor survey)

August 5th, 2009

UK goes crisis camping

Posted by: Simon Falush

If the Hollands Wood campsite in the New Forest, near England’s south coast is anything to go by, the recession really is altering the holidaymaking habits of the British public.

On the often rain-sodden site three Porches, a couple of Jaguars and numerous BMWs and Mercedes were spotted among the more typical, Skodas and Ford Mondeos usually associated with roughing it under canvas.

Unlike for the same period last year, the campsite was solidly booked out, despite no sign of the barbecue summer the weathermen promised.

One camper, Sarah, a senior publishing executive gave some clues to explaining the popularity of the cost-effective approach to getting away from it all.

“I’ve had a bonus every year for the last 15 years, until this year. I used it to pay off my credit card bills and then start again on the next year’s spending which included the holiday.”

It was the first ever experience for her family of five on a campsite and it was a bit less upmarket than last year’s holiday spent in a gite in the fashionable French Dordogne.

But the dark cloud of a severly impared income and a soggy English holiday had one silver lining.

“It has reminded me of the truth that all my four year old needs is a stick and a puddle to be truly happy.”

(Reuters photo: Eddie Keogh, Glastonbury 2005)

July 17th, 2009

UK heading for second downturn?

Posted by: Jeremy Gaunt

MacroScope is pleased to post the following from guest blogger Julian Chillingworth. Chillingworth is chief investment officer of UK investor Rathbones. He questions here whether Britain will face a second downturn shortly after struggling out of recession.

Are we likely to witness a two-tier recession in the UK?  Perhaps not a recession but certainly a secondary downturn. A vast number of people have enjoyed lower mortgage payments and a level of job security, but will this last?

The UK is in somewhat of a unique position in so far as it faces a regime change, with some obvious ramifications for policy.  However, whoever takes the seat (most likely the Tories) must still cut back public expenditure and raise taxation, both within the context of high unemployment.

It will require the wisdom of Solomon as a further rise in unemployment hits tax-take and results in rising social security payments. Who would want to be George Osborne?!

Key will also be the state of the financial services industry, the banks – other G7 nations do not have the ‘core component’ element to deal with in this respect – and the consumer won’t be moved in any meaningful fashion until there is real evidence of stability there.

Economic news is improving, but in the near term sentiment will be led by the direction of earnings.

The bottom line is the US might be troughing out, but this time round, we in the UK could be on our own for a little while longer.

July 15th, 2009

What me, British economist?

Posted by: Sebastian Tong

Time was when a British education had a cachet, especially among Britain’s far-flung colonial territories.

But could the prestige of even a Cambridge or Oxford degree be a little dulled in these parlous days for the British economy, now labouring under massive public debt and a decade-high unemployment rate?

That appears to be the case in the former British colony of Singapore, whose rapid economic development since independence in 1965 has seen it accumulate hundreds of billions of dollars in reserves and attain a GDP per capita on par with Italy.

The city-state’s newest opposition politician Kenneth Jeyaretnam has complained that the Singapore press — often accused giving more favorable coverage to the ruling party — has been referring to him as a “British-trained economist”.

Jeyaretnam, like many members of Singapore’s political establishment — including the country’s first prime minister and current prime minister — went to Cambridge.

“I wonder why I have never read in the Singapore press, British-trained mathematician prime minister Lee Hsien Loong or British trained-lawyer, Minister Mentor Lee Kuan Yew,” Jeyaretnam said in a speech to the Singapore Foreign Correspondents Association earlier this month.

“Naturally I suspect that the mainstream media want to light up a subliminal marker in the people’s minds that a) I’m a foreigner and b) that my economics is suspiciously left-wing because it’s from a country associated with economic failure and the welfare state.”

Ouch.

July 7th, 2009

Crisis, what crisis, time again in Britain

Posted by: Jeremy Gaunt

Britain’s recession, like the downturns in most other places, is being hailed as either having reachえd bottom or tailed off in its decline. The latest to trumpet the beginning of the end is the British Chambers of Commerce, which said business orders and sales had continued to fall in the second quarter but at a slower pace than previously.

So does this mean that the Bank of England will soon start raising interest rates from the negligible 0.5 percent reached last year as policymakers sought to pump liquidity into a failing economy? Not according to researchers Capital Economics, which argues in a new report that market assumptions of higher rates at an early stage are misplaced. They offer three reasons:

A return to strong levels of activity and rapid price gains in the housing market is unlikely for some time, even at very low interest rates. Meanwhile, the overall economy is likely to expand at only sluggish rates in the foreseeable future. And even if the recovery continues to gather pace, the large amount of spare capacity - or slack - in the economy suggests that there should be no hurry to tighten policy at all.

– Even when monetary policy is finally tightened, some part of this will involve the reversal of the Bank of England’s quantitative easing programme. Although the likely order of events is far from clear, this could delay the need for a conventional tightening in the form of higher interest rates.

– Thirdly, there is good chance that monetary policy in general takes a back seat to a substantial tightening of fiscal policy as the government responds to the growing pressure to sort out the public finances. This is likely to take the form both of higher taxes and a severe squeeze on public spending and would require monetary policy to be kept correspondingly loose to prevent the economy from slipping back into recession.

So, essentially, the BoE will not be able to raise rates because a) the economy is a long way from good b) it has other things to unwind first and c) life is going to be so miserable for Britons that low interest rates will be their only salvation.

This latter point is beginning to excerise a lot of thought in Britain, with the head of the Audit Commission criticising politicans for failing to be honest about the need for cutbacks, given a forecasted £175 billion public deficit this year — more than 12 percent ofgross domestic product.

“People had better understand this is an unprecedented situation. We have never seen anything like this in your lifetime or mine,” Former prime Minister John Major, who knows quite a bit about crises, told TV presenter Andrew Marr.

(Reuters photos: Eddie Keogh and Darren Staples)

July 2nd, 2009

Germany’s Finance Minister takes aim at the City

Posted by: Dave Graham

Has German Finance Minister Peer Steinbrueck finally said what many world leaders think but are afraid to say? That the British government won't sign up to meaningful reform of financial markets because it is too worried about what it would mean for the country’s most famous cash cow, the City of London.

 

The City, which accounts for around 35 percent of global foreign exchange turnover, has been a popular target for critics of capitalism for years. But it has rarely been singled out so bluntly as a problem by one of Britain’s close allies.

 

Even for a man not known for holding his tongue, Steinbrueck’s remark on Wednesday that Downing Street was impeding reform because it had “practically aligned” its interests with the City, was unusually undiplomatic. Just days before global leaders meet at a Group of Eight summit in Italy, Steinbrueck suggested the British government was plotting a “restoration” of the pre-crisis order to protect its own interests. The United States, by contrast, was now open to reform, he said.

 

Rather than attempting to smooth ruffled feathers when she addressed parliament on Thursday, Chancellor Angela Merkel picked up the thread, saying she would not tolerate efforts to stall reform at the G8 summit, though she did not name Britain.

 

Steinbrueck’s comments generated a strong response on German websites. Though he belongs to the centre-left Social Democrats, many readers of conservative daily Die Welt wrote in to praise him. “Finally the truth”, “genius” and “backbone” were some of the remarks his stance provoked. Across the channel, the most popular reader’s comment posted online in an article by Eurosceptic British newspaper the Daily Mail also backed the 62-year-old. “I’m with the German finance minister,” it begins.

 

Whether one agrees with his approach or not, Steinbrueck knows he is not talking into a vacuum. Large swathes of the commentariat believe not enough has been done to stabilise financial markets over the long term. Martin Wolf, chief economics commentator of the Financial Times, wrote on Wednesday that without radical changes, another banking crisis is inevitable.

 

PHOTO: German Finance Minister Peer Steinbrueck addresses a news conference in Berlin, May 13, 2009. Steinbrueck said on Wednesday Germany's interbank lending sector was still suffering from weak confidence. REUTERS/Fabrizio Bensch