A View from the Bridge - May 2013

The World economies show signs of a change in rhythm, stepping up to a foxtrot…slow, quick, quick! Earlier this year the IMF said that we would probably see a 3 speed global economy and there are a number of indicators that have confirmed that over the last month.

There are however some snippets of information that really reflect the changes that have been happening and all of them relate to economic growth and involve a “lite” theme. In the slow economies of the world, particularly the Eurozone, the policy makers have not only extended the debt repayments of half a dozen countries but in the face of huge unemployment and potential social unrest, they have changed policy direction and decided to opt for “austerity lite”. Whilst this will not in itself create the kick start to growth that many want, it does signify an acceptance that fiscal tightening is not the panacea it was once thought to be.

Meanwhile, in the quick economies of the world, the “inflation lite” policies of PM Abe in Japan, appear to be bearing fruit and growth forecasts have been revised upwards and endorsed by the OECD. Of more significance for the Global economy though is the strong performance of the US. House prices are on the rise and portfolios of sub-prime mortgages are being sold but the most intriguing development is the re-emergence of the “covenant lite” structures in the leveraged loan market. This is perhaps a sign that the worm is turning but the real challenges of turning off the QE tap and rising rates remain.

In the Money Markets LIBOR rates remained static, rates remaining at last months levels 3mth closed at 0.50%, 6mth closed at 0.59%. Fixed Term rates (longer than 1 year) reversed the previous trend lower, 5 Years closed at 1.108% (+21bp), 10 years closed at 2.023% (+23bp), 20 years closed at 2.843% (+19bp) and 30 years closed at 3.056% (+16bp).

UK Government Bond yields were also higher. The 10 year UK Gilt Benchmark closed at a yield of 2.00% and the 30 year UK Gilt Benchmark closed at a yield of 3.27%.

GBP future inflation expectations expressed through 20 year Inflation Swaps traded within a narrow range over the month opening at 3.59% and closing at 3.605% with a high of 3.633% and a low of 3.557%

In the Foreign Exchange Market GBP was weaker against the USD$ at 1.5198 (1.5532 ) and slightly lower against the EURO at 1.1693 (1.1795)

In the credit markets UK Banks 5 years CDS spreads ended mostly higher with RBS ended at 169bp (+12bp), Lloyds 149bp (+3bp) , Barclays 137bp (+8bp), Nationwide 112bp (+6bp), HSBC 84bp (-1bp) and Santander UK 154bp (-9bp).