Weekly Update 17 June 2012

Seven more days pass and turmoil in the markets continues. Following the carnage of two weeks ago and global stock markets tentative rebound on hopes of a fresh stimulus from central banks and Spain’s €100bn bailout last week. Their rally swiftly evaporated as markets digested what the deal actually meant.

However, the Bank of England announced on Thursday that it is announcing a dual stimulus package. One, in combination with the Government the Bank of England will provide cheap credit for the UK Banks – consequently UK Banking shares rose sharply on Friday – including the R.B.S. which rose by over 8%, Lloyds TSB rose by over 5% and Barclays Bank rose over 4%. Secondly the Central Bank announced the Extended Collateral Term Repo Facility which was suggested back in December 2011 has now been enacted. This means that UK Banks will now have access to short term money to deal with exceptional market pressures. Therefore banks are able to borrow at least £5 billion every month to cover any shortfalls in ready cash which they will then be able to lend out to borrowers including individuals and companies.

As well as anxiety about the burden it would add to Spanish sovereign debt, bondholders were unsettled about where the cash will come from. If the New European Stabilisation Mechanism is used, existing bondholders would become junior debtors – raising the chances of sizeable “haircuts” in the event of a default or restructuring. The jitters pushed yields on Spain’s ten year bonds above their pre-bailout level to a euro-era high of 6.81%. The deal left Ireland, Greece and Portugal questioning the terms of their own, more stringent, bailout terms.

There was further evidence of flagging growth in BRIC (Brazil, Russia, India and China) countries. Furthermore US factory output figures in May fell 0.4% against a rise in April of 0.7% in statistics released by the US Federal Reserve last week. This compounds the statistical concern emanating from the United States where retail sales also have fallen by 0.2% in May. Consumption accounts for around seventy percent of total economic output in the USA and consequently these figures are watched very closely by not just the US but by global markets.

Furthermore in the US the unemployment rate increased from 8.1% to 8.2% in April this is despite a recent report by the US Federal Reserve which has stated that US growth is growing.

China cut interest rates for the first time since 2008, ahead of figures showing that manufacturing and consumer spending had flagged in May. For borrowing the Chinese central bank deposit rates were cut by .25% from 3.5% to 3.25% and loans were reduced from 6.56% to 6.31%. Furthermore they have held back from implementing stricter rules to prevent this from impacting further on the Chinese economy as China is concerned about the state of the World economy and subsequently is determined to try and stimulate the Chinese domestic economy through domestic consumer spending.

Standard & Poor’s warned it may downgrade India’s credit rating. The Bank of England ignored IMF advice and kept interest rates on hold at 0.5%, and made no move to introduce further quantitative easing.

Preliminary estimates of Jubilee sales looked good: Tesco reported its biggest ever week outside Christmas, with £1 billion  in sales. They came too late to affect its Q3 figures, which showed a 1.5% sales decline.

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