Martin Luther King said that ‘the ultimate weakness of violence is that it is a descending spiral, begetting the very thing it seeks to destroy.  Returning violence for violence multiplies violence, adding deeper darkness to a night already devoid of stars.’ The same could be said of fear and the financial markets. Any good feeling that the AIG rescue deal gave the markets quickly evaporated as stock markets around the world plunged deeper into the red.

The dollar was hit hard overnight over the mounting concerns that Morgan Stanley, another Wall St investment bank, would be the next company to fall over; negotiations are ongoing between Morgan and Wachovia, a US retail bank, over a potential tie up. Merrill Lynch was the first to do this over the weekend as it teamed up with Bank of America and will be able to benefit from the latter’s strong depositor capital base.

We of course had at first rumour and then confirmation of consolidation in the UK banking arena as Lloyds TSB had a 232p pre share offer for HBOS accepted. As an indication of the demise of HBOS, the UK’s largest mortgage lender, the price Lloyds will pay is less than 1/4 of the share price a year ago. The deal has been helped along by the Government and the Competition Commission agreeing to waive anti-monopoly rules given the extraordinary times that money markets are going through at the moment.

Sterling was one of the main beneficiaries however yesterday as it jumped higher against both the USD and EUR. The Bank of England announced that the ‘Special Liquidity Scheme’ that it has been running since the beginning of  the year and allows banks to swap toxic mortgage debt for government bonds will be extended by another 3 months. The jump seemed strange as this was a U-turn for Bank Governor Mervyn King who effectively ruled such a measure out last week in testimony to Parliament.

Fear is rife at the moment and further volatility is all but assured; UK retail sales could deflate this recent sterling bull run if the falls are as expected and remember what the caterpillar calls the end of the world, the master calls a butterfly.

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 Please feel free to contact me (jeremy.cook@worldfirst.com) if you have any questions or thoughts regarding these updates or if you are interested in a particular event in the calendar. If you would like to discuss your foreign exchange requirements, please contact our:Corporate Foreign Exchange Team on 020 7801 9050 or our Private Client Currency Exchange Team on 020 7801 9080.   

Disclaimer: The above comments are only our views and should not be construed as advice. You should act using your own information and judgement. Although information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute the author’s own judgement as of the date of the briefing and are subject to change without notice.Any rates given are “interbank” i.e. for amounts of £5million and thus are not indicative of rates offered by World First for smaller amounts. E&OE. Definitions of jargon/market terms can be found in our Glossary of Foreign Exchange Terms.