Away from the turmoil that we are seeing on the streets of the UK, matters in the financial markets are equally chaotic. The FTSE 100 dipped below the 5000 benchmark for the first time in over a year and indices across the world are showing similarly sharp declines.
What has caused it? Well, concerns over global growth have been growing over recent weeks and months. There has been a noticeable slowdown in growth data throughout the global economies. Most alarmingly though, the US economy has entered an alarming ‘soft patch.’
Eurozone debt issues have also built to a crescendo in recent weeks. Greece narrowly avoided a messy default (though it was clearly a selective default) and was dealt its second bailout in 18months and Portugal has had to be bailed out. Even more concerning is the fact that bond yields in Spain and Italy (two major eurozone economies) have hit record highs in the past week. Unless borrowing costs in these two nations calm down, the willingness of Germany to provide further funding will be stretched to breaking point. Surely Germany cannot be expected to bankroll the eurozone’s heavily indebted states indefinitely.
Arguably the straw that broke the camel’s back was rating agency Standard & Poor’s avoidance of the United States’ AAA credit rating. Their eleventh hour avoidance of a US default failed to prevent the move, and global markets have reacted by flooding out of risk assets and into safe-havens such as gold and the swiss franc.
The steep decline we have seen in recent sessions has stabilised today, perhaps indicative of a feeling that stocks have been oversold. However, with the US Federal Reserve meeting tonight and tomorrow’s UK quarterly inflation report likely to downgrade respective US and UK growth forecasts, the good news story to boost confidence looks unlikely to be forthcoming.
The safe-haven dollar is trading pretty strongly at present but long-term prospects look fairly grim from where we are sitting. Low growth, high unemployment, a debt downgrade, ultra-loose monetary policy and the possibility of a third programme of quantitative easing, low inflation; all these factors point to a weaker dollar. Yes the UK and the eurozone have their own problems, very serious problems, but the dollar looks particularly weak in the long-term.
Meanwhile, events in London may well be taking their toll on the sterling. Things are getting out of hand and it wouldn’t be surprising for the markets to finally take note.
Richard Driver
Senior Analyst – Caxton FX
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