A View from the Bridge - September 2012

What goes down can stay down, so said the Central Bankers in key financial markets around the world as they continue to keep global interest rates artificially low. The Fed led the way with the announcement that it will buy additional mortgage-backed securities at $40bn a month and keep rates on hold at 0.25pc, possibly until at least mid-2015. Shortly thereafter, the Japanese announced a further $10bn of QE to assist their faltering economy and the UK too kept rates unchanged and QE steady at £375bn.

The only exception to this Global consensus and co-ordination was Europe! Despite the Europeans (golfers that is) showing over the weekend that they can combine together brilliantly with a clear game plan and perfect execution, the European politicians lack the same sort of vision and continue to prevaricate. The markets were buoyant when Draghi announced that the ECB would make an unconditional pledge to preserve price stability for the Euro by buying bonds of those countries whose borrowing costs are prohibitively high (QE in disguise). Once they read the small print the markets realised that any offer was conditional on those countries asking for help and submitting to a fiscal future in the hands of outsiders and they swiftly lost any ground they had gained.

The UK has not been immune with Moody’s announcing we could lose our AAA rating, and as our trade deficit narrowed and business optimism was at a 20 year low, we may even see a reduction in interest rates to 0.25% in Q4 rather than more QE.

From a market perspective LIBOR interest rates (out to 1 year) continued to tighten in with a flattening of the Yield Curve and Fixed Term rates (longer than 1 year) ending lower by a couple of bps out to 15 years but wider a couple bps from 20 years onwards. According to the market Base Rate expectations are unchanged with another cut expected in 2012/13 and increasing again from 2014. Base Rates over 1% still not expected until 3rd Quarter 2016.

UK Government Bond yields were higher. The 10 year UK Gilt Benchmark closed at a yield of 1.7270% (1.4640%) and the 30 year UK Gilt Benchmark closed at a yield of 3.068% (2.944%).

In the Foreign Exchange Market GBP was stronger against the USD$ at 1.6155 (1.5864) but slightly weaker against the EURO at 1.2547 (1.2620)

In the credit markets the UK Banks all tightened in, with RBS, Lloyds and Santander Uk around 40bp tighter, Barclays and Nationwide around 20bp tighter and HSBC a slight 0.5bp tighter.