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On Tuesday last week Retail Sales were released and they showed a sharp slowing of growth throughout July, this was due to fears over government spending cuts which in turn knocked consumer confidence. The British Retail Consortium said that like-for-like sales rose 0.5% compared with July 2009 but that this was down from June’s growth at 1.2%. Apparently consumers are shunning high-value items, with television sales being hit in particular as well as internet and telephone sales being at their weakest for a year. Food sales have picked up and I blame comfort-eating, but according to the BRC it has more to do with spending being concentrated on essential items.

The spending cuts which are so unsettling the ‘shop till you drop’ attitude is still at the forefront of the coalition’s issues. Cameron stated that the goal to shrink the peacetime deficit from 11% to nothing within 5 years is ‘the most urgent task’. However, as we have gathered it will not be as easy as it seems, with minsters trying desperately to cut spending by 40% on Treasury orders. The current spending review will be revealed on the 20^th of October and many are sceptic as they believe cuts will be made on what is easier for politicians rather than best for the social and economic goals.

Rightmove’s housing price survey was released this morning showing that prices fell by the largest amount since December. According to the property website asking prices for homes in England and Wales fell by 1.7% in August due to an oversupply of property coming at the same time as Britons desert the country in pursuit of warmer climates. Prices were 4.3% higher than a year ago, above July’s 3.7% annual growth rate but below the 5.0% seen in June.

UK gilts rose today knocking two year note yields to the lowest they have been since March 2009 thanks to declining stock markets and hints that the global economy is flailing, boosting demand for the comparative safety of government securities.  More stress is likely to be piled on tomorrow when CPI is released and expected to show – again – growth slowing in July.

Have a wonderful week!

Jeremy’s Trade of the Week

This week’s trade of the week is a 50% participating but differs in that, for an increased risk , you benefit from a higher worst case rate (WCR). The client sells GBP and buys EUR to pay suppliers in Holland.

The client was able to achieve a worst case rate of 1.19 on their option and they benefit in 50% of any upward movement i.e. on expiry should GBP/EUR spot be trading 6 cents above worst case rate, the client would benefit by 3 cents and receive 1.22. Should the GBPEUR rate be below 1.19 and above 1.10 on expiry they are able to buy euros at 1.19, if it is below 1.10 however then for every percentage point below 1.10 they lose the same off their WCR of 1.19

This strategy is premium free and allows a hedge with a nominal WCR of only 3 cents from current market price while a normal participating forward would see a WCR at least 2 further cents lower. It is also relevant for buyers of sterling and sellers of other currencies. As there is a potential further weakening for sterling in the future, it provides a balanced upside for this potential, while guaranteeing a tight worst case rate.