By Darrell Jobman Editor-in-Chief of

The financial-market stresses continued to ease during the week with attention focusing more on the deteriorating global economic condition and the central bank responses.

There was a significant decline in Libor interest rates over the week as liquidity improved. As market rates declined, dollar rates dipped to their lowest level since late 2004. Equity markets were firm early in the week, but failed to sustain the gains and renewed declines helped underpin the US dollar as defensive demand persisted.

The US data releases had a consistently weak tone. The ISM index for the manufacturing sector fell sharply for the second successive month with a decline to 38.9 from 43.5 previously. This was the weakest figure since 1982 and indicated that the economy as a whole is in recession, especially with depressed readings for employment and orders. The services-sector reading also declined to 44.4 in October from 50.2 the previous month with another weak employment reading.

There was also a further decline in factory orders and job cuts also continued to increase while auto sales fell sharply. The latest ADP report also recorded a decline in private-sector employment of 157,000 for October. The latest US jobless claims were again relatively steady in the latest week at 481,000 while continuing claims were at a 25-year high. Non-farm employment fell by 240,000 in October after a revised 284,000 decline the previous month while unemployment rose to 6.5% from 6.3%.

Following the data releases, markets continued to price in further interest rate cuts by the Federal Reserve before the end of 2008.

Democrat Senator Obama secured a very convincing win in the electoral college vote for President, although the popular vote was closer. In the congressional elections, there were also further Democrat gains, although they fell short of winning the 60 seats required in the Senate to neutralise Republican opposition

US Dollar Index
Source: VantagePoint Intermarket Analysis Software

At the latest ECB council meeting the central bank cut interest rates by a further 0.50% to 3.25%. In the press conference following the decision, Chairman Trichet stated that there had been discussion over whether to cut by a more aggressive 0.75%, but caution prevailed given that rates had also been cut in October.

The bank stated that inflationary pressures should continue to decline while growth risks remained to the downside. Despite a very high degree of uncertainty, the comments overall suggested that the bank would cut rates further.

The Euro-zone data remained generally weak with a downward revision to the October PMI data, especially within the services sector. The latest German industrial data registered a record 8.0% monthly decline in orders for September.

There were further stresses within the European bond markets as German/Italian yield spreads continued to widen.

The dollar continued to fluctuate sharply over the week and, after sharp losses around the middle of the week, there was a sharp recovery against European currencies and it settled close to the 1.28 level.

The Japanese yen found support weaker than the 100 level against the dollar and pushed back to 97.50 as equity markets weakened again. The yen also reversed intra-week losses against the Euro.

Although the manufacturing PMI index was slightly stronger than expected at 41.5 from 41.2 the previous month, overall economic fears intensified. There was a further decline in the construction and PMI indices with the services data at a record low. The official industrial production data also recorded the seventh successive monthly decline.

The Bank of England sanctioned a much larger than expected interest rate cut with a cut in the base rate by 1.50% to 3.00%. This was the largest decline for over 25 years and also pushed rates to 50-year lows. The bank stated that economic conditions had deteriorated sharply over the past few weeks and there was a substantial risk of inflation undershooting the 2.0% target.

Sterling rallied strongly at times, but was unable to sustain the gains in very volatile conditions and suffered renewed losses as domestic and international conditions deteriorated over the second half of the week. Sterling dipped to lows below 1.56 against the dollar and re-tested record lows against the Euro near 0.82

Swiss National Bank officials expressed increased unease over the economy with Chairman Roth stating that concerns had increased over the past few weeks.

In the event, the National Bank announced a surprise interest rate cut of 0.50% which took the central rate down to 2.00% from 2.50% previously and there were warnings over a GDP contraction for the next few quarters in comments on Thursday.

The franc was generally weaker against the Euro, although it did find support weaker than the 1.50 level. The Swiss currency weakened to re-test 2008-lows near 1.18 against the dollar.