Even though we are now over 18 months into the credit crunch, banks are still surprising the markets by announcing huge losses, which will hamper the efforts of government to install some security and stability into the markets. Lloyds was the latest, when it warned that HBOS, a bank it recently took over, would report a record loss of 8.5bn; Lloyds shares fell by a third, and Sterling seems to have suffered as a result. The weekends G7 meeting may also have hit investor risk appetite as it announced no new initiatives, it did endorse all the individual nation's packages and promised appropriate cooperation if they considered currency moves to be excessively volatile. Sterling was knocked back down to around 1.42 against the Dollar late on Friday.
Sterling has also dropped against the Euro, in spite of Eurozone GDP, announced on Friday, being weaker than expected, at 1.5%qoq, a third consecutive quarterly decline. There is now a real risk that the Eurozone could suffer a worse downturn than the UK this year; as the ECB seem more reticent to cut rates, and there is some disarray within the Eurozone states, as they all turn to their own stimulus packages, even building protectionist measures into them, then the Eurozone may find it harder to climb out of the mir
The week ahead is a busy one for the UK, we've already had the first house price survey, this one from Rightmove, which has shown a surprise 1.2% rise in asking prices; of course these are just asking prices, so it probably represents more misplaced hope in home sellers, than it does a genuine improvement in the market, which is still expected to fall over the year. Over the rest of the week we have inflation figures, due out tomorrow, which are expected to show a further fall, but not by as much as the fall in commodity prices would suggest, as the falling Pound help keeps import prices high. Wednesday brings the BoE minutes, which may contain evidence that the MPC discussed quantitative easing measures, which seemed to be hinted at when the quarterly inflation report was released. To finish, on Friday we get official retail sales figures, these have been extremely volatile as of late and actually showed an increase last month, which may mean that this month we get a fall, which would be in line with the feeling on the high street.
Sterling may suffer to make much headway this week, although the general trend still seems to be upwards, and we are unlikely to see the extreme lows of the last few weeks.
Michael Corcoran - Treasury Partner | Treasury Solutions | nabCapital