A View from the Bridge - August 2012

All eyes were on the Hole at the end of the month; not the European hole that is being dug deeper and deeper, nor the sort that is the other great USA v Europe head to head, the Ryder Cup but Jackson Hole where Chairman of the Federal Reserve, Ben Bernanke was pointing the way ahead. Bernanke described the current US economic situation as “far from satisfactory” and gave a robust defence of past central bank interventions which prepares the ground for a 3rd round of quantitative easing.

He urged European leaders to make faster progress in tackling the debt crisis as unemployment in the Eurozone hits an all time high of 18m since monetary union. With the combined Eurozone economies shrinking by 0.2% in the last quarter, Italy’s public debt hitting a record high of €2 trillion, Spanish bad debts reaching 10% of total bank lending and Spanish savers pulling out their money from banks at a record rate then the ECB should ride to the rescue…..one would have thought! Alas, Ms Merkel insists the ECB cannot start buying Club Med bonds until all the conditions of the “Pact” have been met i.e. Italy and Spain must first request a formal rescue from the European Stability Mechanism (“ESM”) or the bail-out fund (“EFSF”) and sign a “Memorandum” ceding fiscal sovereignty to EU inspectors!

So forget the Ryder Cup, the action is going to be in the European Champions league with some cracking fixtures over the next season: Greece v Germany (currently in extra time and a draw), Spain v Northern Europe (just kicking off), Netherlands v Europe (elections mid Sep), Germany v France (no date yet) and possibly a final next year of the bail-out funds v national democracy!

From a market perspective interest rates saw some volatility with both LIBOR rates (out to 1 year) and Fixed Term rates (longer than 1 year) eventually ending lower. According to the market there is an expectation that the Base Rate will be cut another 25bp in 2013 and will start increasing again from 2014. Base Rates over 1% now are expected 3rd Quarter 2016.

UK Government Bond yields were slightly lower out to 20 years, but the 30 year closed higher. The 10 year UK Gilt Benchmark closed at a yield of 1.4640% (1.4850%) and the 30 year UK Gilt Benchmark closed at a yield of 2.9440% (2.8860%).

In the Foreign Exchange Market GBP was stronger against the USD$ at 1.5864 (1.5650) but slightly weaker against the EURO at 1.2620 (1.2740)

In the credit markets the UK Banks performance was varied, with RBS, Lloyds, Nationwide and Santander UK credit spreads (risk) all tighter (less), but Barclays and HSBC both slightly wider (increased risk).