Tuesday 25th November 2008

Well, I Don’t Feel Any Better Off …..

The Chancellor duly delivered his pre-Budget Statement to an enthralled world and largely produced what had been anticipated. The known factors are worrying enough, the unknown components of the cure will keep economists employed for years to come, pontificating the why’s and thee wherefore’s. An interesting quote within an article in the Times this morning attributed to JK Galbraith; ‘there are 2 types of economists, those who don’t know what will happen and those who don’t know they don’t know’. Over the next few months/years, there will be plenty of the latter….

Anyway, both cable and the Stock Market ended higher; more on a weaker $ and on relief over the Citicorp rescue than a passion for all things UK related but was not well received by the Gilt market which in turn pushed up the price of hedging against losses on British government bonds (CDS’s on gilts). In other words, the UK as an investment was perceived to be less secure at the end of the day than it had been at opening.

Yesterday saw the November German IFO index of the business climate dive off once more to a cyclical low of 85.8 – the record low was back in October 1982 at 76.7. This however marks the starting point for a lurch lower in statistics from both Germany and the Eurozone. Today’s 3rd Qtr German GDP release will undoubtedly be the portent for sharply lower 4th Qtr figures to come. From this we can see that the latest news is decidedly not good. The economy is spiralling downward towards zero with the pace of price increases following the same road. This is a good scenario for bonds but bad for everything else. We have 3rd Qtr GDP for the US, this afternoon and the same for the UK tomorrow. A great chance for a comparison of the 3 economies.

On the exchanges, we have seen little action since close of business yesterday. Euro/$ has attempted breaking through 1.2900 this morning but failed and Sterling saw some good buying early on from Asian players. Today’s catalysts would appear to be this morning’s appearance of BoE/MPC members before the Treasury Select Committee and then, at close of business today, the changes that have been made to the MSCI indices. These will lead to FX flows associated with Fund Managers requiring to balance their portfolios to match the new index make up. It is estimated by UBS that these flows will be roughly $8.2 billion in total with the USD, JPY and AUD deemed to benefit from the Euro, Sterling and NOK. This is a regular, but not frequent adjustment which is always expected to produce more Forex reaction than it invariably does. We will see what happens overnight.

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