A View from the Bridge - October 2013

All eyes remained on the US at the beginning of the month as the Government remained closed. With warnings of dire consequences from the IMF and even the Chinese, wisdom prevailed and a temporary reprieve was achieved by an agreement to raise the debt ceiling until February 2014. US unemployment remained steady at 7.2% and industrial production rose slightly but not enough to convince the Fed to start its taper programme. Global stock markets rose to a 5 year high buoyed by all this news and the return of China to normal growth patterns following the recent slowdown. In Japan, a year of “Abenomics” has had a profound effect as the stock market there has soared by 66%, the Yen has devalued against the USD by 20% and the Bank of Japan has increased its holdings of domestic assets by 33%.

There were some encouraging signs of progress in the Eurozone with production up 1%, Spain coming out of recession (for the moment at least) by growing at 0.1% in Q3 and Ireland setting its last austerity budget before it exits the Eurozone bailout in December. However, it’s what lies beneath that is the real cause of concern with more record youth unemployment (notably France rising above 26% and Italy 40%), and the significant potential that the Eurozone is heading for Japanese like deflation as the rate of inflation drops to 0.7% versus the target of 2%.

The UK economy is growing at the fastest rate in the developing world up 0.8% in Q3 driven by both the construction and services sectors. Whilst unemployment remains constant at 7.7% wages have failed to keep up with inflation (2.7%) and in real terms are the same as they were in 2003. That said, people are still out there spending as new car sales have risen for the 19th consecutive month and house prices have risen 5.8% on the back of mortgage lending up 32% in Q3.

Near term rates again ended unchanged from last month (3mth closed at 0.51%, 6mth closed at 0.58%). In contrast Fixed Term rates (longer than 1 year) were all lower, 5 Years closed at 1.59% (-11bp), 10 years closed at 2.53% (-13bp), 20 years closed at 3.11% (-11bp) and 30 years closed at 3.21% (-10bp)

UK Government Bond were also lower. The 10 year UK Gilt Benchmark closed at a yield of 1.89% and the 30 year UK Gilt Benchmark at a yield of 3.44%.

GBP future inflation expectations expressed through 20 year Inflation Swaps traded within a range of 3.64% and 3.69%, closing at 3.65%

In the Foreign Exchange Market GBP was lower against both the USD$ at 1.6048 (1. 6179) and the EURO at 1.1806 (1.1953)

In the credit markets UK Banks 5 years CDS spreads ended lower with RBS at 155bp (-16bp), Lloyds 110bp (-19bp) , Barclays 112bp (-14bp), Nationwide 109bp (-4bp), HSBC 83bp (-13bp) and Santander UK 133bp (-8bp).