A View from the Bridge - July 2013

“The King is dead, long live the King”!

As we waved goodbye to the Governor of the BOE, Mervyn King, the country joined in the pomp and ceremony of welcoming our future King George VII. If that wasn’t enough to celebrate, we were also informed that our collective happiness was up over the last 12 months and to cap it all we overtook France in the European happiness league table (oh and a Brit finally won Wimbledon again)! Talking of good news, the UK continues on its path to recovery with Q2 GDP expanding by 0.6%, double that of Q1. All sectors of the UK economy recorded growth between April and June with industrial production and the services sector up by 0.6% and construction up by 0.9%.

Whilst the IMF upgraded its growth forecasts for the UK, it cut its outlook for the US, Eurozone and the BRIC economies. That is probably a fair reflection of reality but that is not reflected in investor sentiment as stock markets around the world have broken through record highs which is somewhat reminiscent of the “irrational exuberance” of the mid 1990’s immortalised by ex-chairman of the FED, Alan Greenspan. No doubt in the US that the economy is growing, more jobs are being created and according to President Obama, the “Great Recession” is over but the full effects of any tightening of US monetary policy have yet to be factored in. Combine that with the continued façade that the Eurozone is a problem solved rather than a problem postponed and you get a recipe for continued uncertainty or worse….as the IMF put it, Fed tapering could push the Eurozone in to a “debt deflation spiral”.

Happy days…at least in the UK!

Not surprisingly near term rates where pretty much unchanged, with LIBOR rates static (3mth closed at 0.51%, 6mth closed at 0.58%). The same could not be said for Fixed Term rates (longer than 1 year) which gyrated around the comments emanating from the worlds Central Banks, after the aggressive move upwards last month the shorter end term rates retraced to their mid-june levels before paring back slightly and ending with the curve steeper 5 Years closed at 1.38% (-14bp), 10 years closed at 2.455% (-6bp), 20 years closed at 3.16% (unchanged) and 30 years closed at 3.31% (unchanged)).

UK Government Bond were slightly lower. The 10 year UK Gilt Benchmark closed at a yield of 2.36% and the 30 year UK Gilt Benchmark closed at a yield of 3.55%.

GBP future inflation expectations expressed through 20 year Inflation Swaps traded within a range with a low of 3.62% ,a high of 3.74% and closing again at 3.65%.

In the Foreign Exchange Market GBP was unchanged against the USD$ at 1.5180 (1. 5213) and lower against the EURO at 1.1431 (1.1693)

In the credit markets UK Banks 5 years CDS spreads ended lower with RBS ended at 183bp (-42bp), Lloyds 134bp (-37bp) , Barclays 121bp (-41bp), Nationwide 116bp (-18bp), HSBC 94bp (-24bp) and Santander UK 156bp (-10bp).