Conditions within the global economy continued to dominate market sentiment over the week as liquidity levels weakened ahead of the Christmas and New Year holiday period. Market positioning also became a more important influence as markets looked to assess the potential impact of aggressive official action to support economies over the past two months.
The US economic data remained weak with no suggestion at this stage of any recovery in conditions. Existing home sales fell to an annual rate of 4.49mn in November from a revised 4.91mn the previous month while new home sales also continued to weaken. There was also a reported increase in inventories and decline in prices which curbed any hopes of a near-term recovery.
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The Richmond Fed manufacturing index also fell sharply again with a reading of -55 in December from -38 previously. Initial jobless claims increased
to a fresh 26-year high of 586,000 in the latest week. Despite some relief that the November decline in durable goods orders was held to 1.0%, there was still speculation that the decline in GDP for the fourth quarter could be as much as 5.0%.
The Euro-zone economic data remained weak with industrial orders declining by a further 4.7% in October after a revised 5.4% decline the previous month. The latest Belgian business confidence index also deteriorated further to a record low of -31.3 in December from -23.7 the previous month. Given that the Belgian economy is heavily dependent on export trends and the business cycle, fears over the Euro-zone economy intensified.
The German IFW institute warned over the economic outlook with a sharp downgrading of the 2009 outlook and suggested that the ECB could cut interest rates to 0.50% by mid 2009. ECB officials were generally cautious over the situation and suggested that there was no deflation risk within Europe while Chairman Trichet warned that the substantial policy actions already taken must be taken into account.
Euro/dollar volatility was lower than the previous week with the Euro consolidating around the 1.40 region while the Euro was generally firm on the crosses. The Swiss franc retained a robust tone in the markets with a peak near 1.50 against the Euro while the dollar failed to hold above 1.10.
The latest Japanese trade data recorded a record year-on-year export decline of over 25% due to the serious deterioration in overseas markets. The Bank of Japan warned that output was likely to decline further with conditions described as deteriorating with notably downbeat comments from Governor Shirakawa.
Confidence was also damaged by the announcements that key industrial company Toyota expected to report a loss of the current year for the first time in over 50 years.
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The Japanese Finance Ministry also increased its warnings over potential intervention to weaken the currency which triggered increased caution over yen buying and the dollar was able to move back above the 90.0 level.
UK GDP for the third quarter was revised down to a reading of -0.6% from the previous reading of -0.5%, the weakest reading for over 15 years. BBA mortgage approvals also fell to 17,800 in November from a revised 20,800 the previous month which was a record low and reinforced fears over the economy. There was, however, evidence which suggested that the services sector rebounded in October.
Confidence in the economy and Bank of England will remain weaker in the short term. Bank Deputy Governor Gieve, for example, stated that the bank was aware of the dangers posed by excessive bank credit, but did not take any additional action to curb excess borrowing.
The current account deficit was lower than expected with a GBP7.7bn deficit after a revised GBP6.4bn shortfall the previous quarter.
Sterling remained on the defensive over the week with further tests of support beyond the 0.95 level and the UK currency was trapped below the 1.50 level against the US dollar.
