MARKET REPORT 16^TH MAY 2008

Good Morning,

Following the minutes of the Bank of England on Wednesday, Sterling has been under renewed pressure against the majors trading below 1.94 to the Dollar and down to 1.25 against the Euro, amid concerns that UK economic growth will slow to just 1.0% from 1.6%, while a softening labour market and higher prices will lead to a period of stagflation. UK consumer prices breached the government’s 3.0% barrier last month while record high raw material costs have left manufacturers will little option but to pass on higher costs to the consumer. In addition, the number of people unemployed and claiming benefits rose for a third consecutive month in April while personal income accelerated beyond initial forecasts and to the highest level since November. Weakness in the housing market also overcasts the economy.

The estimate of European gross domestic product showed that economic growth accelerated more than forecast in the first quarter. The resilience of the German economy shows few signs of cracking as the strongest pace of growth in 12-years has assisted Europe through the credit crisis and left the ECB to focus on the threat of inflation.

The renewed appetite for higher yielding assets has seen the Dollar advance against most of the 16 most actively traded currencies but the U.S currency fell yesterday following reports that industrial production contracted by more than twice as much as forecast. The Empire state manufacturing index also showed that regional activity in the New York State declined unexpectedly in May and the report reinforces Ben Bernanke’s comments earlier this week. The Fed Chairman insisted that the turmoil surrounding credit markets is far from over and comes in stark contrast to the recent rhetoric from the Treasury Secretary, Hank Paulson, who said that the economy was through the worst of the credit crunch.

The focus today will fall on the Michigan consumer sentiment index, which is expected to show that confidence declined in May as rising unemployment and higher prices restrict spending.

Michael Ince

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