British Pound Crashes on Dovish BOE Inflation Report

  The FTSE finished the week down slightly, but the real loser last week was UK PLC. The pound crashed as various factors come to a head. Up until July, the US Dollar was the currency the world loved to hate, last week it was sterling’s turn to be punished. The Bank Of England inflation report was more dovish than expected, opening the doors to possible interest rate cuts before the year is out. This coupled with a housing market that has fallen through the roof and warnings of a UK recession being imminent pushed Sterling down 2.8% against the Dollar and 2.50% against the Yen on the week. It wasn’t all one way traffic though and the pound managed to recover some ground against the Euro in particular, finishing down just -0.67. Just a day after the Pounds collapse, it was the Euro’s turn to swoon on speculation that the European Central Bank would begin cutting interest rates next year to boost the shrinking Eurozone economy. The Euro finished down 2.17% against the Dollar on the week and now down 5.74% on the month. World equities finished the week mixed. With the notable exception of the high tech Nasdaq, most world indices finished the week in the flat or down slightly. On the whole though, a relatively quiet economic calendar and low summer volume muted activity after last week’s impressive action. The conflict in Georgia barely registered a twitch on oil prices and the week closed with prices falling to $113.77. Also, due to the cessation of hostilities in Georgia and the resurgent Dollar, Gold fell back well below $800 after a tentative recovery last week. The financial sector was once again under pressure last week and without the FTSE’s other major sector firing on all cylinders (oil), the index is showing weakness where it counts. It has recently been reported that global bank’s losses & writedowns from the credit crunch have exceeded the $500bn marker. To add to the gloom, New York University economist Nouriel Roubini has recently estimated that this figure could double before the crisis is over. The US housing market is still showing signs of weakness. If anything the problem is accelerating despite numerous calls for a bottom over the last 12 months. Foreclosure activity increased by 55% year on year, with one in every 464 houses in trouble. The nascent UK housing collapse still has some way to go to match the declines of the US market, but it may not be long before the UK market registers equally grim readings. Next week is relatively quiet with fewer top tier economic announcements. The week starts with ZEW economic sentiment from Germany on Tuesday morning, followed by US building permits and monthly PPI data in the afternoon. Wednesday release of the minutes from the last MPC meeting will be closely followed especially after the impact of last week’s inflation report. Thursday brings UK retail sales figures, with revised GDP numbers coming on Friday morning. The week’s hot trading ticket will be Fed Chairman Bernanke speaking on Friday afternoon. Last week was quiet by recent standards with no large 300 point rallies on the Dow as we saw the week before. On this note the there was some interesting research from David Rosenberg of Merrill Lynch (credit to Barry Rithholtz for highlighting it). Rather than being a sign of a market recovery, Rosenberg found that every 300 point rally on the Dow Jones Industrial average has occurred only during bear markets. During the 2000 to 2002 bear market, the Dow had fifteen 300 point gain days. Since the markets peaked around September 2007, the Dow has technically been in a bear market and during this period there have been seven days experiencing a 300 point rally on the Dow. More curious was the fact that during the bull run from 2002 to 2007, there wasn’t a single 300 point rally on the Dow. According to Bespoke Investments (bespokeinvest.typepad.com) the average return three months after a 300 point move is just 0.06%, hardly grounds for the start of a spectacular rally. To take advantage of this, we can place a ‘No Touch’ trade on the Dow Jones, predicting that it won’t touch 12,500 at any time during the next 90 days. This could return 57% in betonmarkets.com if successful.