Overall strategy:
In the short-term, the potential for relief in the credit markets will be offset by fears that the global economic conditions will deteriorate further. Given that markets are looking ahead, there should be some net scope for an improvement in risk appetite, but the very serious market and economic stresses will still be very important with volatility staying elevated.
Key events for the forthcoming week
Date |
Time (GMT) |
Data release/event |
Monday November 3rd |
15.00 |
US ISM index (manufacturing) |
Thursday November 6th |
12.00 |
Bank of England interest rate decision |
Thursday November 6th |
12.45 |
ECB interest rate decision |
Friday November 7th |
13.30 |
US employment report |
Dollar:
Confidence in the US economy will remain weak in the short-term with continuing fears that the credit-related shocks will trigger a deep recession after the third-quarter contraction. There will be some optimism that the Fed action to cut rates will help underpin conditions, especially if there is a second fiscal stimulus. From a medium-term perspective there will be fears that dollar stability will be sacrificed to help alleviate the economic downturn. There will also be the threat of reserve diversification. The dollar will still secure short-term support on defensive demand as credit conditions remain tight.
The severe financial stresses and fears over the global economy continued to have a very important impact on the currency markets over the week as the authorities battled to restore some degree of stability. There was a gradual reduction in Libor rates over the week, but credit default spreads were still at very elevated levels.
The US currency remained very strong initially and regained ground late in the week after a sharp mid-week decline for the currency
Volatility remained a key market feature with the dollar at one point weakening the most on a daily basis for 13 years following the rapid gains seen over the previous two weeks. From highs near 1.2350 against the Euro, the dollar weakened as defensive support for the currency lessened, but found support beyond the 1.30 level.
The US economic data remained generally gloomy. Consumer confidence weakened sharply to 38 in October from a revised 61.5 previously and this was the lowest figure on record as present and future expectations components both fell sharply.
GDP recorded a 0.3% annualised decline for the third quarter after a 2.8% increase the previous quarter as consumer spending weakened sharply. Although this was slightly better than expected, it was the first contraction for seven years
There was a recovery in headline durable goods orders, but underlying orders fell. There was a rise in existing and new home sales for September while inventories edged lower and prices fell significantly over the year. Initial jobless claims held steady at 479,000 in the latest week.
Following the FOMC meeting, the Fed announced a further 0.50% cut in interest rates with the Fed funds rate at 1.00%, equalling the lows seen during 2004. In the statement following the decision, the FOMC referred to fact that activity appeared to have slowed markedly while downside risks to growth persisted.
The Fed stated that it will act as needed to promote sustainable economic growth and price stability which will maintain expectations that rates could be cut even further. It is also significant that there was a unanimous vote which suggests that growth fears took centre-stage and markets priced in the potential for further rate cuts.