London Burns and markets crash

Tom Tong09/Aug/2011Currency Updates

GBP

GBP is showing signs of a recent slowdown in economic growth as questions are beginning to be raised over whether the UK can hold onto its AAA rating following S&P’s downgrading of long-term US debt from AAA to AA+. However, despite these reports the sterling is a less volatile currency compared to the EUR and we expect to see GBP holding its ground of the back of the US debt downgrade. Economic data out of the UK has indicated that interest rates will not rise over the remainder of this year, and although inflation has been stubborn as it has been above the Bank of England’s target range, the mood appears to reflect more quantitative easing if growth remains sluggish domestically and external risk factors begin to stutter as the global recovery intensifies.

Furthermore, the pound maybe also at risk if the BoE cuts its quarterly inflation growth forecast which is due to be announced on Wednesday and the fall of markets continue as the FTSE 100 lost 178 points or 3.4%, as the first time in its history saw triple figure losses four days consecutively.

EUR

Due to the US downgrade over the weekend we have seen all economies fall. There are now fears that European economies could be downgraded as well; especially worried is France who could be in danger of losing their AAA rating.

The ECB bought Spanish and Italian bonds yesterday; however this only gave a temporary reprieve.

The two main European indices were both down. The DAX down 5.02% and the CAC 4.68% – as well as all other world markets. This is the first time all have been negative at the same time since 1996.

USD

As anticipated, the US lost its AAA credit rating on the back of the new debt ceiling agreement that was reached last week which raised concerns that more was needed to be done to cut the deficit and that America’s political system struggles to define and execute policy with any predictability.

This has created fear and turmoil in financial markets as investors flee the markets. Never in its history has the FTSE seen four straight days of downward spiral over 100 points. Things are no better in other markets as the Dow Jones closed 5.5% down and the Nasdaq also did so by 6.9%. This pessimism looks to continue throughout the week ahead, adding more market issues.

Sentiment in the market is that the US could be heading to another recession and this is forcing investors into safe haven commodities still further with gold reaching another record high at over $1770 early this morning and the greenback dropping to another record low against the Swiss franc, which is struggling to find ways to curb its never seen before strength.

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Written by Tom Tong

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