A View from the Bridge - January 2013
So it’s out with the old and in with the….more of the same….or is it?
In the US, the fiscal cliff which was moved at the last minute has to be addressed as does the EU Budget whilst in the UK everything will be done to avoid a triple dip. But all these are familiar themes and it is to Japan that many economists and strategists have turned to this month as the Bank of Japan bows to political pressure and changes its decades long policies by setting a new inflationary target of 2%. In addition, it says it will buy € ESM bonds to help the €uro and weaken the Yen.
Meanwhile in the Eurozone, Barroso says the threat against the survival of the €uro has been overcome, which is great rhetoric but fails to address the continuing divergence of the GDP figures between the north and south. Moreover the record unemployment figures and collapsing retail sales in the south will need some remedial action other than the ECB lending to the banks. Interestingly overall eurozone bank lending is shrinking indicating that no new lending is going on and this is backed up by the fact that 278 banks have started to pay down the €1trn LTRO facility.
The UK meanwhile has a potential triple dip, a probable loss of its AAA rating and a in/out debate on staying in the EU to deal with. That said the OECD and the IMF say our recovery is on track so not expecting much in the way of U-turns. In the banking world, analysts say that the nationalised banks will need billions more capital, some of which will be needed to fund the costs of interest rate mis-selling which some say will cost billions rather than millions. The silver lining is that mortgage lending has started to pick up and house prices are on the rise!
In the Money Markets 2013 started with LIBOR rates remaining fairly static, 3mth closed unchanged at 0.51%, 6mth closed 2bp lower at 0.65%. Fixed Term rates (longer than 1 year) all rose steepening out to 8 years, 5 Years closed at 1.17% (+16bp), 10 years closed at 2.08% (+21bp), 20 years closed at 2.92% (+19bp) and 30 years closed at 3.15% (+18bp).
According to the market Base Rate expectations of another cut in 2012/13 have continued to reduce and expected to increase above 0.5% now from 2014, Base Rates over 1% are now expected in 2016.
UK Government Bond yields started the year higher with a steepening of the curve. The 10 year UK Gilt Benchmark closed at a yield of 2.09% and the 30 year UK Gilt Benchmark closed at a yield of 3.32%.
With the confirmation that RPI Inflation measure will remain the same there was a consequential rise in future inflation expectations through Inflation Derivatives. 20 year Inflation zero coupon opened 2013 at 3.20% closing the month at 3.65%.
In the Foreign Exchange Market GBP was weaker against the both USD$ at 1.5846 (1.6255) and EURO at 1.1666 (1.2317)
In the credit markets there was a mixed change in UK Banks 5 years CDS spreads RBS ended at178bp (+20bp), Lloyds 153bp (+20bp) , Barclays 138bp (+9bp), Nationwide 114bp (-26bp), HSBC 81bp (+6bp) and Santander UK 167bp (-16bp).
Source PegCap GBP Monthly Report
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