Equity markets continued their remarkable rally yesterday, with global equity markets rising almost 12% higher in the longest upward streak in four years, in spite of some less than stellar earnings reports, although the rise in US new home sales has given the markets a boost. The collapse in US housing was the starting pistol, that saw the network of trades that were meant to spread risk thinly, but instead linked banks together, start to topple like dominoes. It is perhaps no surprise that the recovery in the housing market is taken as such good news within the markets. As the equity markets have risen so has risk appetite, and the higher yielding currencies, in relative terms, have once again benefited. The Australian Dollar and the Kiwi have once again risen, with the AUD pushing Sterling once again below two AUD to the Pound, as Sterling struggles to take full advantage of the markets conditions.
The Pound used to be one of those higher yielding currencies, but as rates have been cut across the more mature economies interest rate differentials have narrowed, although the antipodean currencies still retain a sizeable gap. Although the Pound may not get decent returns in the wholesale banking markets the news has been full of banks charging small business customers rates much higher than the BoE base rate, and there is no doubt that banks are putting margins up and charging small companies more, although it could be argued that they were undercharging for risk when the times were good. Whatever the morality of the increased cost of borrowing it further shows the disconnect between the BoE Base rate and the reality at the coal face. The MPC have started QE measures to reduce this disconnect and it has had some effect in pushing through some extra money into the economy, however it has also had the effect of keeping Sterling weak and this is partly the reason it has kept below 1.16 against the Euro overnight, although it has risen against a US Dollar, which has weakened as risk appetite has increased, rising to above 1.6550 overnight.
It's another quiet data day today with just the CBI distributive trade survey for those looking at the domestic markets to get their teeth into. Retail sales jumped surprisingly last month, and the distributive trade survey should give some idea to the shape of retail sales for July, which are likely to fall back from the previous month, the weather hasn't been so good, but is still likely to show a small jump on the previous years sales. The overall shape of currencies are more likely to be dictated to by the equity markets, so expect Sterling to stay steady against the Euro, while suffering against the AUD.