August’s dire public finance figures have swept in to remind us of the huge fiscal challenge ahead. The monthly borrowing total of £15.9 billion was almost £2billion larger than last year’s equivalent figure, it was also the biggest August deficit since records started in 1993. Thanks to the low borrowing outputs in previous months August’s figure left the cumulative borrowing total over the first five months of this year at £58.1billon, which was 6% lower than last year. If this was sustained over the remainder of the fiscal year then annual borrowing would hit about 145billion which would be below the June budget forecast. This is all dependent on this slight gain, which is not apparently invincible…
Tax revenues have picked up as the annual growth rate of income tax, corporation tax and VAT receipts have all exceeded the June budget forecasts, especially VAT with the upcoming rate hitch. This would make us believe that the future is rosy but as these figures are only positive because tax revenue was low last year, during the recession, it gives the impression that we are celebrating mediocrity. With over half the fiscal year already passed it is difficult to make firm conclusions about borrowing hitting or missing the June forecast. The real test in the future is later in this fiscal year, when the recovery starts to slow and we can start to fully understand the success rate of the Coalition departmental spending cuts.
Defeated brother David Miliband won a standing ovation after his first speech to the Labour conference since the shock of his brother beating him in the leadership rate on Saturday. He called for unity, urging delegates to set a united front and to end the ‘cliques and fractions’ of the party’s recent past. Gracious in defeat he declared: ‘Historians will look back on our conference in Manchester and say, this was the conference when Labour not only looked forward to its own future but to look forward to the future of Britain.’
Meanwhile Alistair Darling has encouraged brother Ed to a adopt a ‘credible’ policy on tackling the deficit, in what could be his last speech as shadow chancellor he asked the new party leader to take the softer approach and not be drawn into a detailed spending cut debate.
Jeremy’s Trade of the Week
This week’s trade of the week is a brand new structure combining the ability for you to hedge yourself above the current market level while still being able to take advantage of upside that comes your way as well. This new structure is called the ‘Forward Enhancer’
With GBPUSD currently trading at 1.5850 we were able to give the client a hedge at a level of 1.60. This is an obligation to buy USD at 1.60 as long as GBPUSD does not trade at 1.49 or 1.67 throughout the duration of the structure . Should it do so then your obligation at 1.60 ceases and you are left with a ‘Convertible Forward’ with full protection at 1.52 and an upper barrier of 1.69. On expiry If the spot rate is below 1.52, you have the right to sell GBP at 1.52. If the spot rate has traded at or above 1.69 during the month before expiry, you are then obligated to buy the notional amount of USD at 1.52. If the spot rate is above 1.52 and spot rate has at no time during the month before expiry traded at or below the barrier level of 1.69, you can buy USD at the market rate on the day.
This strategy is premium free to the client and is also relevant for sellers of sterling and buyers of other currencies. As there is a potential further weakening for sterling against the US dollar given the run it has had of late, it provides a balanced upside for this potential, while guaranteeing a tight worst case rate.
For full details of this structure please contact one of our options traders on 0207 801 9050.