Dubai grabbing the headlines

2nd December 2009

The Dubai furore continues and undoubtedly will do so for some time; the market seems to have contained the news with a rally in Asian stocks and US stocks steady yesterday. What we do know is that if Dubai World defaults then lenders will have to take the hit, however the market feels this is unlikely. As UK banks will be the hardest hit in this eventuality, then sterling has remained soft as the USD gives up its gains. Let us see if the pound can start to play catch up today- it is certainly out of the blocks well.

There were other things happening in the world although they all took a bit of a back seat. Most important was the result of and action that followed the Monetary Policy meeting in Japan this morning. Interest rates were, as expected, left unanimously at 0.1% but the market was surprised by the announcement of a Yen 10 trillion injection of funds into the economy to attempt to stave off the ongoing deflation in the country. The cash would be introduced to lenders and be backed by JGBs, Corporate Bonds and Commercial Paper. The Yen dipped initially, recovered a tad and then eased again- nothing substantial but a move in the right direction as far as the Government is concerned.

The Reserve Bank of Australia, as predicted, raised their official rate by 25 basis points to 3 3/4% completing a hat-trick of interest rate rises- a first for the central bank. The Aussie remained very quiet with both the decision and the comments that followed widely anticipated. The Nationwide BS in the UK this morning released data that indicated house prices had risen by 0.5% in November and a slightly more sustainable 2.7% on the year. No real reaction from the FX markets although this data will help consolidate the pound.

Looking ahead this week we have the European Central Bank rate decision with the Bank of England the following week. Recently the feedback in economic data from the eurozone has been good with consumer sentiment improving, along with better feedback on indicators for retail, services and manufacturing sectors. There is now a strong possibility that the European central Bank may raise their GDP outlook and look towards an exit strategy from their unconventional monetary policy measures. However there is also real concern growing over the health of the economy of Greece, with rumours abounding that it has sought the help of China to relieve its latest trench of government debt. In addition German Chancellor Angela Merkel is rushing through a fresh package of measures to shore up ailing banks and prevent a second wave of the debt crisis suffocating large parts of manufacturing industry. The potential for future problems within credit for european economies and banks would certainly undermine the euro. Recently the euro has gained across the markets and it has been heaviliy bought into as an alternative reserve currency over the USD by Asian central banks and Russia. However any fears surrounding the health of the eurozone and the potential for another credit crunch say in Germany would lead to a sharp sell off in the euro.