A View from the Bridge - September 2013

This month it was the turn of the US to produce the “Shock of the Month”. Although the headlines today are all about the US government shutting down, it was actually the announcement mid-way through last month that the US Federal Reserve would NOT begin tapering of their QE programme that caused markets to stall. It had been envisaged that the nascent US recovery would allow this to happen but clearly the FED was not yet convinced. Although US GDP continues to grow; 2.5% in Q2 up from 1.1% in Q1, US jobs growth was not as large as expected and consumer confidence has fallen to its lowest since April.

In Europe Angela Merkel won a historic 3rd term in office and repeated her mantra that a continuation of austerity was the key to a Eurozone recovery. Against this backdrop, even the VP of the EC Oli Rehn warned that the Eurozone crisis was not over, the OECD told us that the Eurozone could still pose a significant risk to Global recovery and the ECB acknowledged that Greece would likely need a 3rd bailout! With Spanish public debt reaching a record 92.2% of economic output, Italian banking sector bad debts jumping 22% from last year and even the Dutch forecasting to miss their EU deficit target, the German voters are certainly putting their money where their mouth is!

If we ignore the grandstanding of the UK political parties in their annual conference season, the UK has reasons to be cheerful. Importantly, the Bank of England sees no need to raise interest rates or increase QE as the recovery continues to gather pace with factory orders and output growing at the fastest rate for 20 years, productivity rising for the first time in 2 years and the Bank itself raising its growth forecast to 0.7% for Q3. In addition, UK Government borrowing has fallen as tax receipts rise, house prices have surpassed the levels of 2008 and inflation has dropped slightly to 2.7%. With growing evidence of recovery it will be interesting to see where market expectations of interest rates go in comparison to the forward guidance from the Bank of England.

Near term rates ended unchanged from last month (3mth closed at 0.52%, 6mth closed at 0.59%). Similarly Fixed Term rates (longer than 1 year) were also unchanged, 5 Years closed at 1.70% (-1bp), 10 years closed at 2.66(-1bp), 20 years closed at 3.23% (-1bp) and 30 years closed at 3.31% (unchanged)).

UK Government Bond were slightly lower. The 10 year UK Gilt Benchmark closed at a yield of 2.72% and the 30 year UK Gilt Benchmark closed at a yield of 3.54%.

GBP future inflation expectations expressed through 20 year Inflation Swaps traded within a range with a low of 3.62% ,a high of 3.71% and closing again at 3.64%.

In the Foreign Exchange Market GBP was higher against the USD$ at 1.6179 (1. 5473) and higher against the EURO at 1.1953 (1.1728)

In the credit markets UK Banks 5 years CDS spreads ended lower with RBS ended at 155bp (-17bp), Lloyds 127bp (-17bp) , Barclays 126bp (-8bp), Nationwide 113bp (-3bp), HSBC 94bp (-11bp) and Santander UK 144bp (-12bp).