Never fear, green shoots are here

Risky assets rallied last week as hopes of a global recovery surged, and fears of any further financial pandemonium continued to diminish. Currency and equity markets reacted to this sentiment, as risky currencies were rewarded and safe havens sold off. The pound and its risky counterparts the commodity currencies pressed further north, while the dollar, Yen and franc suffered.

What the markets are witnessing is a turnaround in sentiment from the dark days of late last year. Marie Curie once commented “nothing in life is to be feared. It is only to be understood”. As the credit crisis unfolded, Central Banks have acted calmly to firstly understand how this crisis came about, and then move towards addressing the situation. Worldwide, a generally unified approach of slashing interest rates, supporting financial institutions and stimulating the wider economy has seen global markets start along the right path to recovery, causing global fears to wane.

The extent of the reversal can be illustrated by the VIX Index, often referred to as the ‘fear gauge’ as it measures how volatile markets have been, and are expected to continue behaving. A high reading indicates pulses are still racing, while a lower reading indicates that markets are less fearful. As illustrated by the graph, last week the VIX broke below a significant level of 24, the first time since the collapse of Lehman Brothers last year that it has done so. When market panic reached a climax last year, the VIX topped at levels 89.50.The reading is not a cause for optimism itself; it merely illustrates the underlying optimism in the market which last week was pushed ahead by further positive data and earnings reports. Equity markets in the US and Europe reached their highest levels of the year, advancing over 4% for the week. Predictably, the dollar fell across the board, its index falling to the lowest level in 10 months. Its low yielding partner the Yen also suffered somewhat of a selloff, losing over 1% against the pound and euro and over 2% against CAD, AUD and the NZD.

Data out from the UK was mixed over the week, helping to restrain the pounds advance. Bank of England minutes revealed a generally bullish stance for the UK economy, and retails sales figures also surprised on the upside. However, Public borrowing figures highlighted the ongoing worry of the state of the UK public finances, whilst Friday’s advanced GDP result showed the economy continued to contract by 0.8% in the Q2 of the year, far exceeding economists’ forecasts on the downside.

US data revealed a stabilising unemployment rate and housing market, both major factors in a rebounding American economy. Developments revealing that failing lender CIT would avoid bankruptcy for the moment, and corporate earnings sustaining their positive momentum drove equities higher over the week. Commodities strength in light of market developments has also helped push the dollar down.

This week reveals a drought of tier one data from Europe, with the US providing the Fed’s beige book, initial jobless claims, a PCE reading and finally an advance GDP figure. The strong correlation that equity movements and currency movements have been displaying will mean that stock markets should once again provide the main decider of the pounds fate for the week.

With risky assets rallying worldwide, and fear levels abating it is worth noting the cautious thoughts of respected investor Warren Buffet who famously states to “be fearful when others are greedy and greedy when others are fearful”

Trade of the Week

This trade of the week is relevant to a seller of sterling and a buyer of dollars. This zero premium structure enabled the client to hedge their exposure for a six month period through a ‘window convertible forward’.

The client has a worst case rate (WCR) of 1.61 and can benefit 100% of any and all upside up to a rate of 1.80 during the relevant window period. Should GBP/USD hit 1.80 at any point in the window period, the structure reverts to a forward contract at 1.61. For full details of this structure please contact one of our options traders on 0207 801 9050.

For full details of this structure please contact one of our options traders on 0207 801 9050

Have a great week