‘I am not worried about the deficit. It is big enough to take care of itself’  - Ronald Reagan

This morning at 10am David Cameron launched gave a speech at the Open University in Milton Keynes preparing the country for the mammoth task of contending with the 156bn deficit issue. This speech was definitely not for the faint hearted with Cameron sugaring no pills by coming out with statements such as, “This is worse than anything people have had to deal with before” and “The overall scale of the problem is even worse than we thought.”

The speech was meant to serve as a guarantee to the public that the coming cuts would be worth the pain in the end, however it came across more like an apocalyptic sermon, not only are we all going to be affected by the cuts, but we are all in it together – the ‘Big Society’ obviously necessitates a membership fee. He also assured us in the speech that he would consult the public and business before initiating the cuts but it was inevitable that this would lead to difficult decisions in pay, pensions and benefits.

This speech was a build up to the June 22nd Budget announcement, Osborne sees the coming few weeks as vital in the turning of Britain’s financial stability. Both Cameron and Osborne were pleased by the success of receiving G20 endorsement for the government’s position. They also plan to publish forecasts by the Office for Budget Responsibility which are expected to downgrade the growth forecast for 2011. We have our suspicions that it will be an unpleasant ride for sterling this month.

The G20 finance ministers meeting held over the weekend came to the conclusion that they would drop the proposal for a worldwide banking tax. The opposition was led by Canada, who see no need for a levy as they did not bail out their banks during the crisis, but Australia, China and other countries were also unsure about the proposed levy. Osborne however plans to go ahead with a UK based bank levy which we should hear more about later this month in the Budget. Cable will be licking his lips in anticipation we think. G20 ministers also decided that they couldn’t wait any longer to remove the fiscal stimulus because they now believe that expanding fiscal policy will not be effective.

Last week saw UK house prices fall for the second consecutive month during May. Halifax released the report on Friday that the 0.4% fall put out analysts who believed that the prices were going to rise, however the housing market is still 8.3% higher than April 2009. This could prove difficult for the housing market to make significant gains during the course of  this year.

The Prudential/AIA deal is still making waves, with the spotlight falling on the lead adviser Credit Suisse and their inability to aptly shape and nurture the deal leaving blame at their doorstep. With investors still pushing for a change at the top the future is still uncertain for McGrath and Thiam, this week will likely see more criticism come their way.

Trade of the Week

This week’s trade of the week is a Convertible forward for the next 6 months . For a seller of sterling and a buyer of euros, this client took advantage of the uncertainty in GBPEUR in order to protect himself against falls whilst being able to benefit should the market turn to 18 month highs.

The client was able to achieve a worst case rate of 1.20 on his option which allows the client to benefit all the way up to a rate of 1.27. Should the rate touch 1.27 during the barrier period then the structure reverts to a forward at 1.20.

This strategy requires no premium, and is also relevant for buyers and sellers of sterling and other currencies. As there is a potential further weakening for sterling in the future, it provides a balanced upside against this potential, while guaranteeing a tight WCR.

Have a wonderful week!