Lots of news and volatility

Lots of news and volatility

Lots to talk about on yesterday’s trading day. Early in the trading day the OECD (organization for Economic Cooperation and Development) provided an upbeat assessment for the economy. The think tank pointed to a recovery albeit fragile in the OECD area for 2010; for Britain it was not wholly optimistic- forecasting that the economy will contract by 4.3% in 2009 and stagnate in 2010- this goes against the grain of government forecasts of growth in 2010. It forecast that UK public debt will rise to 14% of GDP and this would prevent further stimulus action if required. GDP forecasts for other major economies show contractions of 2.8% in the US, 6.8% in Japan and 4.8% in the eurozone.

Sterling is a little weaker this morning against the USD and the Euro…dissidence between Mervyn King and the government on fiscal policy is not helping sterling’s cause. Mr King was stated that the “scale of the deficit is truly extraordinary” and he criticized the lack of a long term plan of fiscal policy which has essentially undermined the governments actions to date. The buzz words now are long term and sustainable as the bottom is perceived in major economies; attention will turn to sustainable recovery and planned action for public debt against the previous reactive measures introduced in the face of the sharp downturn. Sterling should improve with improving economic conditions and economic confidence but steps must be taken now to reduce the UK deficit or the UK economy could suffer a relapse.

Spencer Dale recently noted that the weak pound was helping to economic conditions in the UK, the market took the view that he was talking down the pound following recent gains. The SNB (Swiss National Bank) went one step further- the Bank for International Settlements (BIS) – which traders said were acting on behalf of the SNB sold the franc against the euro and the dollar. The SNB declined to comment on the intervention which led to the franc weakening sharply across the markets- this also firmed up the euro and the USD.

Yesterday saw unprecedented liquidity funding from the ECB to lend at 1% for 1-year refinancing- this attracted 1120 banks in return for approximately $500 billion. The key question for the euro is how much of this funding will be converted to other currencies and when- this could weaken the euro over the next few sessions.

Finally we saw the recent fed meeting last night; no huge surprises here. Their assessment was moderately upbeat confirming that the pace of contraction was slowing. The FOMC underlined however that rates will be kept low for some time; the dollar gained in the run up and following the release making all the ground lost earlier in the day against sterling- this highlights the uncertainty in the markets especially surrounding key data snaps.

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