A View from the Bridge - October 2012

At the end of any quarter we of course get some interesting stats coming through and this quarter has been no exception. It is the stats coming out of the eurozone that are likely to have the most immediate impact on interest rates as unemployment across the Eurozone rose to a record 11.6% (which masks the dire figures from Greece and Spain where overall unemployment is 25% and youth unemployment more than 50%) and inflation, which remains stubbornly high at 2.5%. The likely impact of this is a likely cut in eurozone interest rates by the ECB in early December to 0.5% from its current 0.75%.

Despite the potential rate cut and the easing of funding constraints with the support of the ECB, European banks have, according to the latest ECB quarterly survey, made it harder for firms to borrow in the 3rd quarter and they expect to toughen loan requirements further in the quarter ahead!

Elsewhere there were some positive stats being released with the UK officially coming out of double dip recession and inflation dropping to a 3year low of 2.2% and the US posting a 2% growth in the economy in Q3 and unemployment at a 4year low of 7.8%.

The 3 major events in the coming month to keep an eye on are of course the outcome of the US Presidential race, the race to save Greece from default on the 16th November and the current court case of Guardian Homes v Barclays Bank which is looking at the manipulation of Libor and the its impact on interest rate swaps.

From a market perspective LIBOR interest rates (out to 1 year) again continued to tighten in with a flattening of the Yield Curve and Fixed Term rates (longer than 1 year) were slightly lower out to 3 years but wider from 4 to 30 years with a steepening between 4 to 15 years [see page 4 & 5]. According to the market Base Rate expectations of another cut in 2012/13 are slightly reduced and expected to increase again from 2014. Base Rates over 1% still not expected until 2016.

UK Government Bond yields were higher. The 10 year UK Gilt Benchmark closed at a yield of 1.8520% (1.7270%) and the 30 year UK Gilt Benchmark closed at a yield of 3.099% (3.068%).

In the Foreign Exchange Market GBP was slightly lower against the USD$ at 1.6129 (1.6155) and weaker against the EURO at 1.2446 (1.2547)

In the credit markets the UK Banks 5 years CDS spreads all tightened in, with RBS market movement of -34bp (closing CDS Spread of 189bp), Lloyds -27bp (181bp), Barclays -32bp (157bp), Nationwide -14bp (167bp), HSBC -22bp (108bp) and Santander Uk -20bp (227bp).