A View from the Bridge - March 2013

All eyes moved from Italy to Cyprus as the Cypriot Government warned that it would run out of cash by May if they could not reach agreement on a bailout. Within a few days capital outflows reached 12% of GDP (€1bn) adding to the €1.7bn that had already gone since the start of the year. Of course by the end of the month an agreement had been reached with the Eurozone insisting on the restructure of the Cypriot banking system and it was the depositors not the taxpayers who paid, along with the bondholders and shareholders. On the one hand this could be described as capitalism working as it should but on the other many depositors would call it outright theft! Whichever way you look at it, the events in Cyprus can be seen as a seminal point in the history of the Eurozone, it may have been saved, but it demonstrates that a monetary union is impossible to sustain in the absence of a political union across Europe.

Away from the Eurozone the US continues to show signs of real recovery this month as manufacturing data improved and unemployment fell to a 5 year low. As a result, stock markets reached their all time highs with the S&P 500 surpassing the levels of October 2007. If the economic and financial crisis is abating, the potential for an international political crisis heightened as North Korean vowed to strengthen its nuclear capabilities and declared that it was in a “state of war” with South Korea.

In the UK, the BOE kept rates and QE on hold and Mervyn King says GBP has fallen far enough based on our recovery prospects, which are backed up by the OECD and the ONS. That said, the UK’s trade deficit jumped to its highest level for 25 years so GBP remains under pressure.

In the Money Markets LIBOR rates remain the same, 3mth closed unchanged at 0.51%, 6mth closed 1bp lower at 0.60%. Fixed Term rates (longer than 1 year) all fell but with a flattening of the curve, 5 Years closed at 0.948% (-10bp), 10 years closed at 1.886% (-13bp), 20 years closed at 2.749% (-13bp) and 30 years closed at 2.987% (-15bp).

UK Government Bond yields were also lower again. The 10 year UK Gilt Benchmark closed at a yield of 1.759% and the 30 year UK Gilt Benchmark closed at a yield of 3.10%.

Future inflation expectations through Inflation Derivatives were slightly higher with 20 year Inflation zero coupon closing the month at 3.665%.

In the Foreign Exchange Market GBP was practically unchanged against the both USD$ at 1.5121(1.5163) and stronger against the EURO at 1.1804 (1.1613)

In the credit markets UK Banks 5 years CDS spreads were all higher with RBS ended at 219bp (+41bp), Lloyds 188bp (+29bp) , Barclays 164bp (+19bp), Nationwide 117bp (+3bp), HSBC 119bp (+26bp) and Santander UK 171bp (+7bp).