The pound weakened slightly against the dollar yesterday, as concern about the severity of the swine flu outbreak reduced investor risk appetite. Investor jitters over the potential economic impact of a global pandemic were exacerbated yesterday morning following comments by the deputy chief of the World Health Organisation, Keiji Fukuda, who said the virus could no longer be contained and countries should focus on mitigating its effects. His remarks resulted in widespread falls in European equity markets, with travel, holiday and leisure stocks all taking a particular hit. The news that holiday operators Thomson and First Choice have cancelled all their flights to Mexico due to the outbreak only increased investor appetite for safe-haven currencies like the dollar. This risk aversion was further aided by concerns about the US banking sector’s capital needs, as an article in The Wall Street Journal claimed that Citigroup and Bank of America may need to raise more capital based on early results of government “stress tests” on banks. The formal results of the tests are not due until May 4th, however early indications show the banks need to fill capital shortfalls so as not to rely on any more government funds. Both Bank of America and Citigroup have already received $45 billion bailouts from the US taxpayer, and could require more according to preliminary results of the tests. A steady stream of dire financial news from the banking sector has battered the pound in recent months, given the economy’s dependence on financial services, and consequently the possibility that more bad news may be round the corner meant investors looked to sell sterling to reduce risk. Elsewhere, news that BP’s first quarter profits fell by 62% to £1.64 billion because of low oil prices did little to ease risk aversion.
Later in the day, data released in the US showing prices of single-family homes dropped by 18.6% in February from a year ago received mixed reactions from the market. Although the figure remains negative, it did indicate that the pace of decline may have slowed and therefore the US property market could be bottoming out. The Standard & Poor’s/Case-Shiller Home Price Index also showed the composite index of 20 metropolitan areas fell 2.2% in February from the previous month. This news induced a brief rally for the pound, aided by better-than-expected Consumer Confidence data released by the Conference Board in the US. April’s figure of 39.2 was much better than the 29.8 analysts were predicting and also showed a positive improvement on the 26.9 registered in March. Sterling’s afternoon recovery was also aided by much better-than-expected UK retail sales figures released by the Confederation of British Industry. Its Distributive Trades Survey showed a rise to +3 in April from -44 in March, the first positive reading in a year and much better than the -40 analysts had predicted. The figure gave investors renewed hope that the UK may be tentatively coming out of recession, although the CBI did admit the figures could be slightly misleading because of a later Easter weekend this year.
Sterling’s gains were eventually wiped out late in the day, however, as news that the swine flu virus had spread as far afield as Israel and New Zealand weighed on equity markets. The FTSE 100 closed the day down 1.7% at 4096.4, with the pound finishing slightly down against the dollar at $1.4632.
There are some very important pieces of data out in the US today. At 13.30 BST, annualised American GDP data is released, whilst at 19.15 BST the Federal Reserve’s interest rate decision for April is due. Also at that time, The Federal Open Market Committee’s Minutes will be released to the market, with investors eyeing them closely to try and determine where future US interest rate policy is headed. CaxtonFX analysts predict the Fed will not change interest rates from their current 0.25% level, however they may announce an expansion of their quantitative easing program.
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