Continuing speculation on the extent of the sub-prime lending issue, and how the authorities may react to it, is maintaining its grip on the financial markets.

Most recently, US equities have risen to their highest level in a month on the back of an expectation that the US government may implement a plan to limit mortgage defaults, which could sustain bank profits and lessen the extent of the housing slump. This has resulted in the stocks of financial companies and house builders leading a rise in US equities.

The S&P 500 has risen to 1,507.34 while the Dow Jones Industrial Average has increased to 13,619.89.

Looking at interest rates, in the UK, the Bank of England Monetary Policy Committee (MPC) lowered the base rate yesterday for the first time in two years. While there had been a call for a rate cut in some quarters, it wasn’t a foregone conclusion with only 28 out of 62 economists in a Bloomberg survey forecasting a rate reduction. The MPC’s reasoning for the decrease from 5.75% to 5.5% appears to be that the prospect of slowing inflation has provided room to support economic growth via an easing in the cost of credit. The UK interest rate has risen five times since the middle of last year, but up to yesterday had been kept on hold since July.

Elsewhere, the European Central Bank left the benchmark rate unaltered at 4%. The US Federal Reserve will announce its next interest rate decision on 11 December. Fed funds futures contracts indicate that there is a 66% chance of a cut of 25 basis points and a 34% chance of a 50 basis point cut to 4%.

Meanwhile, the Organisation for Economic Cooperation and Development (OECD) has reportedly said that both the US Federal Reserve and the European Central Bank should avoid cutting interest rates on the back of a prediction that the world economy will weather the fallout from the US housing slump.

The OECD view is based on reports that increased trade, employment and corporate profits are assisting the world economy. The OECD has also indicated that Japan should avoid an increase in interest rates to ensure it can break free from the shackles of deflation.

Turning to oil, the price of a barrel of crude has fallen again on speculation that slower global economic growth may reduce fuel consumption.

US fuel stockpiles have reportedly increased with gasoline inventories rising six times more than analysts had forecast. OPEC’s members have not raised production targets, which has been taken as an indication that they are wary of an economic slowdown and increasing reserves.

The price of a barrel of crude oil has fallen to USD87.49, the lowest close since 24 October. It has fallen 13% since reaching a record USD99.29 on 21 November.

Turning to currencies, the dollar was heading towards a second weekly increase against the euro following an easing of concerns that the sub-prime lending situation will push the US economy into recession. The dollar stood at USD1.4622 per euro. In addition, the US currency has risen 1.4% against sterling to stand at USD2.0271 against the pound.

With the sub-prime lending situation continuing to influence market movements, make sure you speak to your Broker about Hansard’s extensive range of funds links, including the innovative protected fund links.

 

David Findlay

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