by Darrel Jobman, Editor-in-Chief,

Conditions within global economies and financial markets continued to dominate for much of the week as volatility levels remained high. There were increasing fears over the outlook for all the major economic areas as the economic data continued to deteriorate while the US financial rescue plans also came into increasing focus.

Initial US jobless claims rose to 516,000 in the latest week from a revised 484,000 the previous week and this was the highest figure since 2001. Continuing claims also increased further and reached the highest level for over 25 years. The latest retail surveys continued to suggest that spending had weakened during October and the official data recorded a 2.8% fall for the month as underlying sales fell 2.2%.

The trade deficit narrowed to US$56.5bn for September from US$59.1bn the previous month. There was a decline in exports and imports for the month. There were market concerns over the implications of declining trade volumes. The monthly budget deficit for October was also a record US$237.2bn as spending rose sharply while revenue fell 7.5% over the year which illustrated the negative impact of a weaker economy.

Treasury Secretary Paulson announced that the focus of the TARP rescue plan would be shifted away from buying bad loans from the banking sector. Instead, there would be increased support for bank capital levels with a greater emphasis on supporting consumer-orientated sectors. There was additional pressure for assistance to the main US auto-makers which continued to face severe financial stresses.

The German preliminary third-quarter GDP data was weaker than expected with a decline of 0.5% after a revised 0.4% drop previously. The French data offered some slight respite, but the Italian data was weak with a 0.5% contraction.

The German ZEW business confidence index recorded a slight recovery to -53.5 in the November reading from -63.0 with the decline in energy prices sparking some improvement, although there were still major concerns over the outlook.

The ECB monthly report stated that the outlook for price stability had improved further. The comments from ECB officials continued to suggest that the bank would be willing to cut interest rates again as growth fears have increased with markets confidently expecting another cut by the central bank in December.

The dollar retained a firm bias for much of the week, notably against Sterling, but was unable to hold the best levels near 1.24 against the Euro. Although fears over the global economy provided support, there were increasing doubts over the US fundamentals as the week progressed.

US Dollar Index
Source: VantagePoint Intermarket Analysis Software

Japanese Finance Minister Nakagawa stated that there was a need to avoid rapid exchange rate moves at all costs and this reinforced speculation over possible action to stabilise currencies at the weekend G20 meetings.

The Japanese currency tested levels below 95.0 against the dollar and 120 against the Euro as equity markets were subjected to heavy selling pressure. A rally on Wall Street triggered a dollar recovery to 98 while the Euro also recovered against the yen, but rallies quickly attracted selling pressure. The dollar pushed to fresh 2008 highs against the Swiss franc during the week with a challenge on the 1.20 level as confidence in the economy weakened.

The UK labour-market data recorded a further 36,500 increase in unemployment for the month following a revised 36,300 increase the previous month. This put the unemployment total at the highest level for over 10 years.

In the quarterly inflation report, the Bank of England downgraded its growth forecasts sharply from the August report and suggested that there would be a relatively severe recession with GDP set to record an annual decline of around 2.0% during the course of 2009. Bank Governor King also warned over the risks of a deep recession.

There was also a sharp downgrading of inflation forecast with the bank forecasting that inflation would be slightly below the 2.0% target level in two years time assuming interest rates at current levels. The report suggested that interest rates would be cut further despite warnings over the impact of Sterling weakness on import prices.

Bank of England MPC member Sentance stated that it would take time for the interest rate cuts to take effect and that the bank would consider at the next meeting whether a further cut is required.

Sterling came under heavy selling pressure as economic fears intensified and marts digested the huge interest rate cut seen last week. The UK currency weakened to record lows beyond 0.86 against the Euro and a six-year low below 1.46 against the dollar as the trade-weighted index dipped sharply to a 12-year trough.