MARKET REPORT TUESDAY 3^RD JUNE 2008

The recent revival in Sterling sentiment came to an end yesterday as the UK currency fell against the Dollar to 1.96 and Euro 1.26 after reports that Bradford & Bingley Plc plunged by the most since the lender went public in 2000 and plans to sell shares at a 33% discount. The UK’s biggest buy-to-let mortgage lender saw its share price plummet 24% by the close of trading last night while the Bank also said that it will sell £179 million in shares to TPG Inc as the housing market continues to deteriorate and mortgage approvals plunge to a nine year low. Sterling also came under pressure as a report on UK consumer credit showed that mortgage lending and approvals fell to the lowest levels since records began in 1999 while manufacturing growth unexpectedly stalled in May.

The report also showed that the index of factory output fell short on initial forecasts and slumped to the lowest level in nearly three years, signalling that the economy is edging ever closer towards a recession. The drop in consumer credit combined with a 2.5% fall in house prices has prompted traders to believe that the Bank of England will cut interest rates this year despite expectations that inflation will exceed the government’s 3.0% limit for the remainder of 2008.  

The recent spate of weakening economic reports has weighed heavily on the Euro in recent weeks but the single currency found some much needed support yesterday as European Finance Ministers met in Frankfurt and insisted that inflation was the single biggest threat to the economy after prices accelerated at the fastest pace in 16-years. The governing council members seemed completely united in their concerns over rising consumer prices and it is now extremely unlikely that the ECB will cut interest rates before the turn of the year.

In addition, the resilience of German exports was reflected in the unexpected increase in factory orders, which rose 35% from this stage in 2007, indicating that demand from overseas will help the economy cope with a U.S led economic slowdown.

The unrelenting increase in oil prices has seen the Dollar struggle against the majors recently but the U.S currency found some much needed support yesterday as the latest figures showed that manufacturing slowed by less than anticipated in May. The ISM index showed that output rose to 49.6 last month, up from 48.6 in April, as a weakened Dollar helped spur demand for U.S made goods and helped factories through a domestic economic slump. Production increased for the first time in three months while a measure of producer prices climbed to the highest level since 2004, indicating that the Federal Reserve may have to start to raise interest rates in 2009 in order to combat inflation. Although the increase in production and construction spending will increase optimism that growth in the economy is stabilizing, a government report showed just last week that U.S gross domestic product rose just 0.9% in the first quarter of this year, capping the worst six month performance since 2003.

Michael Ince

Archive News

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