Daily Financial Market Outlook

Daily Forex Fundamentals | Written by Lloyds TSB | Dec 02 08 08:10 GMT |

Overview & economic commentary The Reserve Bank of Australia cut interest rates overnight by 100bps to 4.25%. The RBA has been very aggressive in cutting the overnight cash target rate since September, lowering the target by 300bps as the Bank tries to avoid a too severe weakening in economic growth as inflation pressures unwind. Elsewhere in Asia, the Bank of Japan announced it will accept lower grade corporate bonds as collateral for loans to banks and start a new lending facility for commercial banks in a bid to unfreeze credit markets. There are no data releases in the UK or the US where the reports yesterday of sharp falls in manufacturing activity in November and steep falls in new orders highlighted the downside risk to gdp growth facing both economies in the quarters to come. The decline in the UK PMI in November to 34.4 supports our view of a 100bps rate cut by the BoE on Thursday. Separately, the DMO will this morning auction £2.25bn worth of 2049 gilts. The auction is the first of conventional long dated paper since the DMO set out the funding terms of the Chancellor's 2008/09 Pre-Budget Report last week and will test appetite for sterling denominated paper at a time when the return on the 50yr gilt is less than 4.0%. Euro zone producer prices data for October will be published this morning and are forecast to show a decline of 0.2% m/m (7% y/ y). A sharp fall in the EU November PMI input and output price components suggest that factory gate prices are likely to stay on a downward trajectory as demand falters and oil prices fall below $50pb Currency commentary €/£ surged 3% yesterday above 0.85 in a sharp reversal of last week's trend. A move towards 0.8568 resistance, the November 25 high, would confirm that we are moving back to the upper end of the trading range. Sterling also fell sharply against the dollar as a broad based flight-to quality prompted demand for the US currency. A decline to the November 13 low of 1.4557 for £/$ cannot be ruled out if the squeeze lower in stocks/commodity prices continues, and the BoE cuts interest rates by 100bps (or more) on Thursday. The A$ took the RBA rate decision in its stride and is trading fairly flat around 59.50 against the yen. Equity markets in Asia followed the US sharply down o/n, helping the yen to rally to a high of 92.89 vs the dollar and to 117.234 vs the euro. The Sek continues to lose ground after the Riksbank's decision to bring forward the rate decision to Dec 4 to Dec 16. €/Sek moved clear of 10.50 o/n and may line up a test of the Nov 21 high of 10.6823. Major data and events today EU-15 producer prices (10:00) Sep -0.2% Y-O-Y +7.9% Oct (f'cast) -0.2% Y-O-Y +7.0% Median -0.3% Range -1.1%:zero Australia current account (00:30) Q2 -AS$12.7bn Q3 (f'cast) -AS$11.0bn Median -AS$11.1bn Range -AS$12.9bn:-AS$8.0bn Australia retail sales (trend) (00:30) Sep +0.2% Oct (f'cast) +0.1% Median +0.1% Range zero:+0.2% Australia interest rate decision (03:30) Current: 5.25% Actual: 4.25% UK DMO to auction £2.25bn of 4.25% gilts due 2049 (10:30) US Fed member Plosser speaks in Rochester (17:30) Chart 1: Sharp fall in oil prices suggests PPI inflation in the euro zone is set to slow markedly over the coming months Chart 2: Central banks of Australia and NZ have pursued very aggressive rate cuts to avoid a severe slowdown in economic growth 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.