YB Currency Update – Monday 7th September

YB Currency Update – Monday 7th September

With only a dreary England friendly to fill the papers this weekend, the major story was provided by the meeting of the finance ministers of the G20 nations. Though stirring, the 'let's teach the banks a lesson' show performed  by Premiers Brown, Sarkozy & Merkel last week lacked any sophisticated explanation of why the three wish to limit bankers' pay - other than the astute observation that such rewards, so soon after the banks were bailed out to an unprecedented extent by the taxpayer, upsets their respective voters. Over the weekend, their collective right hand men have suggested more prosaic measures to make the world's financial system more robust. Primarily this involves increasing and diversifying the capital buffers banks hold in order to cover potential losses. Some European banks were criticised for relying too heavily on complex securities which provided poor defenses against big losses. In place of this, ministers have argued for greater share issuance to build up cash reserves. With all of  this, banks again find themselves in a catch-22, being asked to keep greater capital reserves and lend more money at the same time.

With the one year anniversary of the financial apocolypse nearly upon us, one bank that wishes it had any room for manouvre at the time, Lehman Brothers, has seen the value of its shares soar over the last month from around 5c to around 30c as, with the dust now settled, investors see a potential lottery ticket. Other bankrupt companies, where the value of the shares is usually close to zero because equity investors come last of all the creditors to be repaid - have also seen a frenzy of trading in the last few days, the gamble being that as potential losses were fairly opaque in the frenzy surrounding their demise, crystalised losses may not prove to be as bad as feared. The two US mortgage giants, Fannie Mae & Freddie Mac, have seen similar activity.

Back to the original purpose of this note, strong equity rallies across the board were the theme for last week, the Dollar and Yen suffering with the greater risk appetite. President Obama gives a make or break speech on wednesday this week regarding his flagship healthcare initiative - markets will keep a keen eye on this to provide further direction to the US's ongoing fiscal position. It is amazing to see how fierce some of the detractors have been in their opposition to what is essentially a system for the public good. One eagle eyed commentator observed "would Stephen Hawking even be alive if he lived in a country that provides a public healthcare system?", to which nobody had the heart to inform him that a) Stephen Hawking is native, and resident, to a country that DOES have a public healthcare system, and b) it is to the public healthcare system that he (and the wider community) owes his life.

US markets are closed today due to the Labor Day Holiday, so trading is likely to be fairly illiquid and may see some artificially large movements. Later in the week, amongst a raft of other data for the UK, we have the BOE Base Rate Decision. As with the last few months, the outcome is near certain with no change in rate, and markets may be more interested in the subsequent minutes release to get a feel for the MPC's growth expectations.

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