A View from the Bridge - April 2013

Crisis, what crisis? An economic crisis according to the incoming Bank of England Governor and Fitch agreed as they downgraded the UK from triple A. That said, we did officially avoid a triple dip recession with Q1 growth of 0.3% the growth in the services sector countering continued falls in the construction sector. With UK interest rates unchanged this month and QE kept at existing levels the boost for growth is being centred on the Funding for Lending Scheme (FLS), which has been extended to 2015. Although this is designed to boost lending to SME’s for working capital and investment by giving the banks access to £10 of cheap funding for every £1 they lend to that sector, the danger is that it will cause a surge in lending to the residential housing market which is perceived as less risky.

Back over in the Eurozone, unemployment continued to rise and reached 12.1% in April. As more and more European leaders voice concerns over austerity and the impact it is having on the labour market, the need to boost growth is at the top of the agenda for many. The sharp fall in inflation to 1.2% against the target of 2% may be enough to get the European Central Bank to reduce the key interest rate to 50 basis points this coming Thursday. Whilst that in itself is not going to solve the Eurozone crisis it may provide some temporary relief.

Across the global economy, there is a mixed bag of data but with signs that the US consumer might be starting to spend money again, the outlook may be brighter than it has been for some time!

In the Money Markets LIBOR rates remain pretty much unchanged, 3mth closed 1 bp lower at 0.50%, 6mth closed 1bp lower at 0.59%. Fixed Term rates (longer than 1 year) continued the recent trend lower with the long end flattening against the shorter end of the curve, 5 Years closed at 0.898% (-5bp), 10 years closed at 1.792% (-9bp), 20 years closed at 2.657% (-9bp) and 30 years closed at 2.893% (-9bp).

UK Government Bond yields were also lower again. The 10 year UK Gilt Benchmark closed at a yield of 1.69% and the 30 year UK Gilt Benchmark closed at a yield of 3.01%.

Future inflation expectations through Inflation Derivatives moved lower throughout April with 20 year Inflation zero coupon opening at 3.655% and closing at 3.585%

In the Foreign Exchange Market GBP was stronger against the USD$ at 1.5532 (1.5121) and slightly lower against the EURO at 1.1795 (1.1804)

In the credit markets UK Banks 5 years CDS spreads continued their recent gyrations and ended all lower with RBS ended at 157bp (-63bp), Lloyds 146bp (-42bp) , Barclays 129bp (-35bp), Nationwide 106bp (-11bp), HSBC 85bp (-34bp) and Santander UK 163bp (-11bp).