Bernanke’s comments give markets hope
Currencies Direct October 21st 2008 - 3 minute read
Yesterday's (20 October) fairly restrained market was kickstarted into life in the afternoon by comments from Federal Reserve Chief Ben Bernanke, and seemingly directed at Congress, in which he intimated that the US economy required a new fiscal stimulus to get it back on track. Both the US dollar and the stock market rallied, with the euro hitting an 18-month low this morning. The pound also briefly fell below 1.7100, but early morning jitters have halted the dollar's early progress. Technically, there is strong potential for a further immediate strengthening of the US currency, especially if doubts persist as to the likelihood of a turn around in the UK and Eurozone economies.
LIBOR interest rates continued to correct – rapidly in the dollar's case, but in a more sedate manner for euro and Sterling. The freeing up of the money markets is vital to an economic pick up so expect further central bank measures to keep the momentum going. Expectations for huge liquidity adds plus continued official rate cuts should keep the momentum going but it is a return to confidence between money market operators that will determine whether period lending resumes.
Talking of economic stimulus, the UK, as expected, has reported government borrowing at a record level last month with September's figure surging to £8.1 billion, almost double the number from 12 months ago. Estimates for the total for the year are for an excess of a massive £60 billion, with rises in the deficit for the following two years. With the assertion from Prime Minister Brown yesterday that the UK was looking to stave off a continued slide into recession by spending, plus the additional funding required to fund the financial market's bailout plan, these borrowing figures look destined to deteriorate before any improvement for increased tax revenues are seen.
That's not to say that this is not the right way forward for the UK economy in the short term. Bringing forward Government construction projects to stimulate and underpin the UK building and civil engineering sectors could certainly prove to be inspirational. The problem is that despite having a fistful of factors that they are able to influence, the UK Government is unable to do anything about the one thing that is fundamental to the economy's recovery. That is increasing consumer demand from its current lows. Confidence is at such a low that even if No 10 were able to slash interest rates, it is going to be some time before the consumer returns to the High Street in any numbers. It looks as though it is going to be a long winter……
Elsewhere, Iceland becomes the first sovereign state since the UK in 1976 to go cap-in-hand to the lender of last resort, the International Monetary Fund. For those of you old enough to remember the results in the UK following the IMF loan, the restrictions likely to be imposed upon Iceland will be draconian and make redemption of the frozen deposits (no pun intended) a distant prospect.
There'll be more central bank assistance for the banking sector with the French injecting funds into their larger institutions, and the Saudis also adding liquidity by placing deposits with domestic banks.
Today we are largely data-free, though the UK CBI quarterly industrial trends survey plus the Nationwide regional consumer confidence survey should make interesting reading – unlikely to be positive for Sterling however. The major news event today will be any info on the Lehman CDS settlement figures, especially with regard to the institutions involved. As expressed yesterday, the numbers are still unknown so both stock and money markets will be influenced on any headlines.
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