Daily Financial Market Outlook

Daily Forex Fundamentals | Written by Lloyds TSB | Sep 19 08 07:23 GMT |

Overview & economic commentary An historic week will draw to a close today, but markets remain nervous despite the daily intervention by central banks around the world to calm money and credit markets and facilitate inter-bank lending. In the UK, the FSA yesterday decided to ban short selling of financial stocks until 16 January 2009. In the US, officials are considering a new proposal to move all illiquid assets from financial institution balance sheetsinto an updated version of the 1980’s Resolution Trust Corporation. Economic data is very light today and like most other releases from around the world this week it will probably be overshadowed by possible central bank intervention and speculation of consolidation in the banking sector. The 30bps jump in UK Libor rates this week to 5.97% is also a sign of financial market woes. However, the message sent yesterday by a much stronger than forecast 1.2% m/m (3.2% y/y) gain in UK August retail sales (data for July was revised up) signals that domestic demand is holding up. Whilst weak industrial output data and a rising cost of capital suggest downward pressure on business investment and the broader economy, the sales data gives us confidence that the economy can still avoid a recession. With the BoE still preoccupied by rising inflation, we believe that an imminent cut in base rate is highly unlikely. German producer prices data was published earlier this morning and revealed a decline of 0.6% in August. In the US where most of this week’s market turmoil has taken place, eyes will be on comments on the economy by Fed member Evans. Currency commentary Equity markets got a big lift o/n in the US and Asia on reports the US treasury is working on a solution to remove all troubled assets from bank balance sheets into a new rescue fund. UK bank stocks are attracting strong buying this morning after the FSA decision to ban short selling on banking stocks. Gains of up to 50% are noted for some stocks. The dollar rebounded on the back of the initiative but does not guarantee a stronger finish to the week as oil prices stay bid close to $100. The worsening profile for the US economy may also hurt dollar sentiment. Reports yesterday of a rise in weekly claims above 450k and a 0.5% drop in the leading indicator, a 3rd consecutive decline, suggest that gdp growth is slowing compared to Q2. In EM, the rouble reversed course o/n after managing to slip below 25.0 vs the dollar yesterday. Equity markets remain suspended in Russia until further notice. £/rupee dropped o/n from a 2-month high of 83.38. Major data and events today German producer prices (07:00) Jul +2.0% Y-O-Y +8.9% Aug (f'cast) -0.1% Y-O-Y +8.8% Median -0.5% Range -1.2%:+0.3% Japan Leading index (final) (06:00) Jul (prel) 91.6% Jul (f'cast) 91.6% Japan Coincident index (final) (06:00) Jul (prel) 103.3% Jul (f'cast) 103.3% BoC Deputy Governor Murray speaks (01:30) ECB member Stark speaks (08:00) Fed member Evans speaks at Swiss central bank conference (18:00) Chart: The sharp rise in UK 3-month libor rate this week to 5.97% is a sign that after 13 months, the turmoil in credit markets is not over Chart: Fed Q2 flow of funds data released yesterday showed a further slowdown in growth of US mortgage debt, at the expense of consumer credit Lloyds TSB Bank http://www.lloydstsbfinancialmarkets.com Disclaimer: Any documentation, reports, correspondence or other material or information in whatever form be it electronic, textual or otherwise is based on sources believed to be reliable, however neither the Bank nor its directors, officers or employees warrant accuracy, completeness or otherwise, or accept responsibility for any error, omission or other inaccuracy, or for any consequences arising from any reliance upon such information. The facts and data contained are not, and should under no circumstances be treated as an offer or solicitation to offer, to buy or sell any product, nor are they intended to be a substitute for commercial judgement or professional or legal advice, and you should not act in reliance upon any of the facts and data contained, without first obtaining professional advice relevant to your circumstances. Expressions of opinion may be subject to change without notice. Although warrants and/or derivative instruments can be utilised for the management of investment risk, some of these products are unsuitable for many investors. The facts and data contained are therefore not intended for the use of private customers (as defined by the FSA Handbook) of Lloyds TSB Bank plc. Lloyds TSB Bank plc is authorised and regulated by the Financial Services Authority and is a signatory to the Banking Codes, and represents only the Scottish Widows and Lloyds TSB Marketing Group for life assurance, pension and investment business.