Good Afternoon,

Sharemarket Crash Leaves Sterling Under Pressure  

Mark Cuban, the billionaire entrepreneur must have had last week in mind when he said “If you don’t follow the stock market, you are missing some amazing drama”.

It was a week in which the banking crisis was confirmed as an economic crisis as equity markets experienced nothing short of a meltdown, recording their second worst weekly performance ever, the worst since the great depression. A staggering $7,000bn was wiped off stock market values as the full effect of Wall St’s troubles spread to the wider economy.

All the insecurity worldwide was good news for the dollar which managed some gains throughout the week, owing to a flight to safety in US Treasuries, falling commodity prices and the unwinding of carry trades from riskier high yielding currencies. Sterling continued to stumble, on Friday reaching lows of 1.6820 against dollar and giving up some of its hard earned gains against euro later in the week.

While the equity markets capitulation may have grabbed most of the headlines late in the week, the bailout plan tabled midweek in the UK may leave more of a lasting imprint on the economy.

The UK approach to solving the financial woes differs from the US solution in that it is essentially one of ownership rather than partnership. The US bailout plan purchased bad debts in an attempt to clear up troubled institutions balanced sheets. The UK has chosen to place capital directly into banks in return for ordinary and preference shares. However, it has given banks the option to find the required capital from private means if they so wish. The lolly scramble for private and Government funding will unravel in the next week or so, and hopefully the results will add some confidence back into the markets.

The G7 met over the weekend in order to try and find a coordinated way forward through the crisis. Lasts week’s worldwide interest rate cut was a step in the right direction. While it hardly managed to have any tangible effects on the economy, it did send an important message on the measures Central Banks are willing to take. After witnessing the US and UK unveil their strategy it is now the EU’s turn to reveal their hand and the Euro may therefore be the big mover of the week.

Data out this week

It looks as though currencies will again be largely ignoring data and instead looking for direction from governments and equity markets. We do however have CPI results and RICS house price data due from the UK. Also, Initial Jobless results from the States may prove interesting reading

Have a great week

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