In another day dominated by concerns about euro zone sovereign debt and the most serious military skirmish between the Koreas since the end of the Korean war in the 1950s, we saw the continued rise in risk aversion with a flight to safety amongst international investors strengthening the US dollar, Swiss Franc and Japanese yen whilst the euro continues to lose ground across the board on heightened sovereign debt concerns.
The little UK data out yesterday showed the Nationwide building society suggest that UK house prices will continue to fall in the near future. The lender said potential buyers were being deterred by the uncertainty generated by the government’s public spending cuts. However it said price falls would not be as great as in 2008 due to low UK interest rates which will restrict mortgage arrears and repossessions.
In another sign of a deteriorating UK housing market, the British Bankers’ Association said mortgage approvals by UK banks hit a 19 month low last month while the amount actually lent was the lowest for a decade as UK housing market grinds to a halt. Approvals amounted to just 30,776, down from 31,058 in September and a peak of 45,562 in December 2009. The figure is half the previous average totals for this time of year. Total mortgage advances also slumped to a near 10 year low at just £7.6 billion lent, a level last recorded in February 2001.
The figure for net loans, which excludes redemptions and repayments, did rise slightly to £1.7 billion, but this still represents a fall over 40% on this time last year. There was a slight pick up in the number of people remortgaging during the month at 24,112.
“Activity in the mortgage and consumer credit markets continued to be subdued in October, reflecting uncertain prospects for households and lower consumer confidence,” David Dooks, BBA statistics director, said. Mirroring the slowdown in demand for mortgages, demand for personal credit also slowed with the £5.9 billion borrowed on credit cards during October outstripped by repayments of £6.05 billion. Borrowing through loans and overdrafts, meanwhile, contracted for the 15th consecutive month, while savings rose by £3.5 billion.
Howard Archer, chief UK and European economist IHS Global Insight, said “Housing market activity remains stuck in the doldrums, which seems highly likely to maintain downward pressure on prices.”
Meanwhile, market attention continue to centre on Ireland and the other peripheral euro zone countries with Standard & Poor’s, the ratings agency lowering Ireland’s debt rating two notches with a negative outlook, as the Irish government prepares to unveil a four year deficit cutting plan. Speculators have, however, already moved on to target Portugal and Spain as the threat of the sovereign debt ‘contagion’ spread through the rest of the euro region.
“The Irish government looks set to borrow over and above our previous projections to fund further bank capital injections into Ireland’s troubled banking system,” S&P said in a statement late yesterday. S&P cut Ireland’s long term rating to A from AA- and the short term grade to A-1 from A-1+, the statement said. The reduction leaves its long term grade five steps above Greece which has the highest junk or high risk grade.
The downgrade risks worsening an investor exodus from Irish bonds that has sparked turmoil through the euro region as Ireland hammers out an aid package with the EU and the International Monetary Fund to rescue its banking system. The extra yield that investors demand to hold Spanish 10 year bonds over German bunds yesterday surged to a euro era record.
The Irish government is set to publish an austerity plan required for its EU and IMF led bailout. The four year plan targets total cuts of 15 billion euros or 11% of the Irish economy’s annual output. Meanwhile, state broadcaster RTE said the Republic had agreed a 85 billion euro bailout package but the government called the report “premature”. The four year austerity plan to be revealed on Wednesday is a precondition for the financing.
In Portugal, Prime Minister Jose Socrates is braced for the country’s biggest strike in 22 years as the fallout from Europe’s sovereign debt crisis spreads from bond markets to the streets.
Workers are walking off the job today to protest at the government austerity measures as concern about Socrates’s ability to tame the euro zones fourth biggest budget deficit pushed the cost of insuring Portugal’s debt against default to a record high.
Today see’s the publication of the GDP data for Q3 in the UK. Any sign of a slowdown in UK economic activity will leave the pound open to lose some of the ground recently gained on the back of the euro zone sovereign debt crisis.
In US news, the newly released minutes of the Federal Reserve’s last policy committee meeting reveal that the Federal Reserve has cut its 2011 growth forecast for the US economy to 3-3.6% next year, down from its previous 3.5-4.2% estimate.
It also forecasts higher unemployment and lower inflation than before for the US economy in 2011.
Clients with euro requirements may do well in considering taking advantage of the sovereign debt crisis currently afflicting the euro zone before fresh data turns the attention back on the UK economy, particularly as most analysts expect the UK economy to worsen over the winter months.
Clients with US dollar requirements in the short term may need to consider adopting a ‘sooner rather than later’ strategy as the US dollar is likely to continue to strengthen in the short term if the risk aversion theme continues.
