Tuesday 8th July 2008

We have seen very little move in rates overnight with the Far East happy to leave things approximately as they found them on opening.

All the action yesterday centred around the data from the UK and Germany, both of which proved to be much weaker than had been expected.

German Industrial Production was down 2.4 per cent in May against a forecasted rise of 0.2%. This caused an increase in market concern as to the future growth prospects of the Eurozone economy and called into doubt the wisdom of last week’s ECB rate increase.

There was a raft of weak data from the UK with GDP, Manufacturing Output and a survey from the British Chamber of Commerce all adding to the doom and gloom for Sterling.

There is widespread pressure on the MPC to sanction a cut in rates but expectations are that there will still be a hold on UK rates this month. Looking at the futures market the yield curve is still projecting a 15bp rise in rates by the end of the year, but this has reduced considerably over the last week.

This gave the market the excuse to sell Sterling all round. The move however was short lived and having had a busy couple of hours, the market then stagnated.

US mortgage funders Freddie Mac and Fannie Mae’s shares plummeted to the lowest level in 16 years since the early 90’s tumbling nearly 18% and more than 16% respectively, as Lehmen’s produced a report anticipating that the entities would need to find an extra $75bln in new capital to satisfy new accounting rules. This caused the Dow to dip yesterday but with no real effect on exchange or interest rates.

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