Market Highlights
- Dubai World property scare eases as FTSE recovers
- ECB prepares to withdraw from QE activities
- US employers shed less jobs than any period since 2007
Dubai World Property Scare Turns the Heat Up
As turkey’s make their way to our dinner tables for Christmas, Sterling faced volatile trading conditions between 1.6338 and 1.6722 throughout last week. Investors continued to battle between a state of risk-aversion and risk-appetite ahead of the news that Dubai World, property arm may default on its US$60bln loan commitment. Creditors may seek to take control of part of the Dubai Waterfront property, the size of Manhattan island. The fear for the UK is that much of this $60bln is underwritten by UK banks, namely RBS amongst others, which has already had its lion share of troubles since the start of the recession last year. However, the risk subsided early last week and the pound recovered on the back of the FTSE retracing earlier losses to the current level of 5,320 as investors came back into the market. Gold couldn’t hold its record high last week of $1,226 as investors moved away from the commodity and it fell to its current level of $1,136, a fall of almost 6%. Australia was also reported last week to overtake the US as the second largest gold producer behind South Africa.
Alistair Darling has a busy week ahead of him as he balances the job of managing banker bonuses whilst preparing for the unenviable task of reporting his pre-Budget report on Wednesday. The UK Chancellor has warned RBS that he is prepared to crack down on the Christmas bonuses paid to employees. The tax payer owns 85% of the bank and the government is prepared to step in with measures to control bank paid bonuses if they feel they are not reasonable.
The Reserve Bank of Australia continued to lead the way of commodity driven economies by raising interest rates for the third consecutive month last Tuesday. RBA Governor, Glenn Stevens approved the 25 basis point increase to take the Australian core interest rate to 3.5 per cent. However, investors reacted in a sanguine manner with many pundits taking the view that the rise had already been priced into the market in the weeks preceding the announcement. The move will further increase the attractiveness of the Australian dollar as a currency of choice for carry trade investments going into the new calendar year.
Looking ahead this week for the UK we have manufacturing production on Tuesday, followed by the all important BOE interest rate decision later in the week.
ECB Prepares to Withdarw From QE Activities
European Central Bank announced on Thursday that it intended to begin unwinding the monetary support provided to the Eurozone. Jean-Claude Trichet gave no indication as to when he expected interest rates to begin to rise again. Trichet also said that they would cease lending to banks for greater than a 6 month period from March of next year.
The ECB made no surprises when they announced that there would be no change in December to the 1.0 per cent interest rate, but did say that interest rates have to rise. With growth remaining well below potential and inflation clearly below 2% in 2011, even a normalization of rates would be very premature and could do more harm than good for the Eurozone.
The euro moved within striking distance of a 16-month high of 1.5144, but fell just shy of this and managed to only ease back towards the 1.50 level. Once the non-farm payroll figure was released at lunch time on Friday, risk came back to the market, equity markets pushed forward and the euro retraced back sharply to 1.490 falling 1.5 per cent in an hour.
A quiet week in the Eurozone, relatively speaking, as ECB president Jean-Claude Trichet speaks this afternoon. However, aside from that nothing else of note due out for the region that would be seen to significantly push currency markets.
US Employers Shed Less Jobs Than Any Period Since 2007
US unemployment numbers fell by the lowest number since 2007, as US employers managed to shed only 11,000 jobs in the previous month against an expected 119,000. This means the US unemployment level declined to 10%. An interesting point to note from this unemployment figure is that 50% of people between the age of 16 and 24 are currently unemployed. A survey of 88 economists revealed an expectation that the unemployment level would rise to 10.2%.
The tremors sent through equity markets at the beginning of last week corrected as the week went on. Investors took comfort that the Dubai property company, Dubai World would finalise a deal that would suit its requirements. This helped douse out the flames on the fire that threatened to spread through the stock markets across the world. Investors came out of their places of refuge and saw the FTSE, Eurofirst, Dow and Asian equity markets return some of the huge gains experienced over the last 6 months.
Bank of America declared last week that they intend to repay the $45bln of TARP money committed to them by the US government earlier this year. At the end of last week they managed to raise $19.3bln selling securities at $15 a share. This was the largest single sale of stock by a publicly listed company in the US since 2000.
The institute of Supply Management’s Non-manufacturing index fell to 48.7 in November below the 50 level which indicates expansion in the sector. This is the first dip in manufacturing seen in the US below the 50 level since July of this year.
As far as data is concerned this week, Fed Chairman Bernanke is due to speak later today on his view of the US recovery, and on Friday the retail sales figure is expected to show that sales are continuing to improve in American stores ahead of Christmas.
By Marc Lim, FX Dealer
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