All of that Christmas bonhomie has been stretched to breaking point as disgruntled January sets in, I was suspicious that it wasn’t going to last. One of the antidotes to drinking large quantities of mulled wine and spending too much seems to be channelling rage over the banker’s bonuses which are due out in the next month. David Cameron has taken some stick over the controversial bank payments after he was reluctant to ‘micromanage’ the banks. It is pretty clear that he believes the part-nationalised banks such as RBS and Lloyds should show restraint when it comes to awarding bonuses, but that the banks need to be successful in order for a profit to be made from the government stakes and meddling with the bonuses might damage that. Naturally this gives the Lib-Dems another attempt at the playing ‘good cop’, but failing thanks to an action plan which involves doing nothing. Enter Labour, rubbing their hands gleefully then calling upon last year’s one-off tax levy on bonuses to be extended, which could fund economic growth. The coalition is still going ahead with a new banking levy which is expected to raise money this year but Ed Miliband claims this is not as much as could be raised with the repeat bonus tax. There is some public animosity towards the chiefs who pay themselves bonuses in good times and in bad, but like it or lump it, the payout looks set to go ahead.
Cameron has also been busy warning that rising inflation poses a threat to Britain midst warnings that the Bank of England has failed to deal effectively with the worrying trend. He has insisted that returning to a country where inflation is a persistent problem was not acceptable, and he did go on to say he had faith in Mervyn King, even though figures are well outside what the BoE was expected to deliver.
Last week we saw the expected house price fall for December, the 1.3% drop destroyed the gains seen in 2009. We have been told by Martin Ellis, chief economist at Halifax, that the rate of decline is significantly less than the second half of 2008. Which is good news for 2008’s property purchasers but I doubt if this would provide much comfort for the sellers of the moment. All this huffing, puffing and blowing of house prices down will mean that interest rates are expected to remain low for some time which will at least limit pressure on homeowners and first-time buyers.
Jeremy’s Trade of the Week
This week’s trade of the week is a ‘Participating Forward Plus’. This differs from the usual participating forward in that, for an increased risk, your strike improves from 1.17 to 1.1750. The client decided to hedge his next 6 months of exposure via this trade.
The client will benefit in 50% of any upward movement i.e. should GBPEUR be 1.24 on expiry, 6.5 cents better than the strike rate, the client receives 1.2075, 3.25 cents better than the strike rate. Should the GBPEUR rate be below 1.1750 and above 1.10 on expiry they are able to buy euros at 1.1750, if it is below 1.10 however, then for every percentage point below 1.10 they lose the same off their strike of 1.1750
This strategy is premium free and allows a hedge with a nominal WCR of only 3.5 cents from current market price while a normal participating forward would see a WCR at least 0.5 further cents lower. It is also relevant for buyers of sterling and sellers of other currencies.