A View from the Bridge - November 2012

With the US election out of the way and Obama preparing for a second term the markets turned their attention to the US Fiscal cliff. This is going to require some real compromise from the Democrats and the Republicans and the signs are that they are both beginning to take a pragmatic view for the good of the country. Back in Europe, no such luck! As every Government in Europe imposes austerity cuts, the European Commission wants to agree an increased budget and seems perplexed when the 27 member states can’t agree a way forward. Nevertheless they say, Greece is sorted once and for all and when the debt buyback programme is completed the next instalments of the bailout can be released; only problem is none of the holders want to take a haircut!

What is clear is that the ECB now has enough ammunition to reduce interest rates from 0.75% to 0.5% in the coming month, as we mentioned last month, on 3 major considerations. Firstly the Eurozone is officially back in recession in Q3, unemployment continues to rise and inflation has eased slightly so the ECB is looking for any stimulus it can find. The other thing of note would be France getting downgraded but we won’t labour that particular point.

Back on the home front all eyes are on George Osborne as he presents his Autumn statement on Wednesday. Ahead of that of course he announced the appointment of Mark Carney, the current Governor of the Bank of Canada to be the next and first foreign Governor of the Bank since 1694. Mr Carney is seen as a safe pair of hands to steer us through some very choppy waters.

From a market perspective the LIBOR interest curve (out to 1 year) continued to flatten. Fixed Term rates (longer than 1 year) were slightly higher out to 5 years but lower from 6 to 30 years with a flattening [see page 4 & 5]. According to the market Base Rate expectations of another cut in 2012/13 remain and expected to increase again from 2014. Base Rates over 1% still not expected until 2016.

UK Government Bond yields were mixed. The 10 year UK Gilt Benchmark closed at a yield of 1.7750% (1.8520%) and the 30 year UK Gilt Benchmark closed at a yield of 3.068% (3.027%).

In the Foreign Exchange Market GBP was lower against the USD$ at 1.6013 (1.6129) and lower against the EURO at 1.2331(1.2446)

In the credit markets the UK Banks 5 years CDS spreads all tightened in, with RBS -7bp (closing CDS Spread of 182bp), Lloyds -21bp (160bp), Barclays -8bp (149bp), Nationwide -17bp (150bp), HSBC -18bp (90bp) and Santander Uk -21bp (206bp).