Weekly market analysis: October 10th 2008:
Conditions within the global economy and financial sectors will remain of critical importance. Confidence has been very badly damaged and defensive strategies will tend to dominate in the short-term. These trends will tend to trigger further support for the Japanese currency, although the extent of recent gains looks excessive against high-yield currencies.
Key events for the forthcoming week
Date |
Time (GMT) |
Data release/event |
Tuesday October 14th |
08.30 |
UK consumer inflation |
Wednesday October 15th |
12.30 |
US retail sales |
Dollar:
There will be expectations that the economy will deteriorate further as the credit tightening takes effect with consumer spending under severe pressure. Markets will also continue to speculate over further rate cuts by the Federal Reserve. The US currency will gain some backing if the authorities can restore confidence in the banking system and global economic fears will also tend to offer support. The currency has gained important technical support from the lack of liquidity and, if the global central banks can ease money-market stresses, then demand for the currency would tend to weaken with volatility set to remain at elevated levels.
There was further extreme tensions in the US and global financial markets as fears over the deteriorating economic trends and the banking sector continued to escalate.
At the end of last week, the House of Representatives approved the Troubled Asset Rescue Plan following its rejection the previous week. Despite the approval, Wall Street remained under heavy selling pressure and dipped to five-year lows with the Dow Jones index weakening sharply to below the 9,000 level on Thursday.
There was a sharp deterioration in emerging-market sentiment with the Brazilian and Mexican currencies, for example, falling very sharply. There were also huge stresses surrounding the Icelandic economy and the dollar continued to gain defensive support as funds were forced to unwind positions in emerging markets and commodities.
The global central banks continued to battle against extremely tight credit markets over the week. Despite further liquidity injections and the financial-rescue plan, market stresses remained intense with spreads still at extremely elevated levels. Fears over the global economy, allied with structural dollar demand on a liquidity shortage, continued to benefit the US currency and it retained a firm tone. The dollar pushed to a 14-month high against on a trade-weighted basis.
The Federal Reserve also cut interest rates in a co-ordinated move with a cut to 1.50% from 2.00%. The central bank also stated that it would move to buy Commercial Paper in the markets while there was some speculation that the Treasury would take direct stakes in the banking sector, but sentiment remained extremely fragile.
Federal Reserve Chairman Bernanke was generally downbeat in his assessment of the US economy and at the end of last week there was a reported decline of 159,000 in September employment, the steepest decline of 2008 and the ninth successive decline.
There was little in the way of major economic data over the week with initial jobless claims falling to 478,000 in the latest week from 498,000 the previous week. There was a decline in monthly consumer credit for the first time in over 10 years which maintained fears over the outlook for consumer spending.