An exceedingly well hung government

Sterling still in limbo after indecisive election.  US stock market volatility spreads to currencies.  Latest EU rescue package broadens the safety net beyond Greece and allegedly wins German support.

It was a rather more exciting week for sterling than investors might have wished.   From €1.1550 it climbed as far as €1.1850 before plummeting five cents on Thursday and Friday.  A three-cent bounce and a two-cent fall added to the nervousness.

Investors did not pay the slightest attention to last week’s UK economic data.  Improvements or increases in mortgage approvals, purchasing managers’ indices, house prices and factory gate prices passed by unremarked and almost unnoticed.  The market was far less concerned about what Britain’s economy had done in the past than it was about who would be in charge of it in the future.

On the face of it, investors ought to have been prepared for none of the parties to achieve an overall majority.  After all, the opinion polls had been pointing to a hung parliament since the beginning of the year.  But they were not geared up for one quite so spectacularly well hung.  The Liberal Democrats’ Vince Cable described the result as ‘a perfect snooker’ and the outgoing prime minister decided to stay on at Number Ten for a few days; after all, nobody else was knocking to demand admittance.  Not surprisingly the outcome – or the lack of one – made life uncomfortable for sterling.  The market had been hoping for an incoming government ready to buckle down to the task of sorting out Britain’s debt: what it got instead was the prospect of a coalition arguing about how to go about the job.

But it was not the election that led to the massive volatility on Thursday and Friday, it was Wall Street.  In less than an hour on Thursday New York share prices collapsed by almost ten per cent.  In terms of points it was the biggest ever one-day move and the subsequent rebound was almost as scary. The fall rubbed off on equity markets around the world and investors abandoned ‘risky’ currencies, flocking to the safety of the US dollar and the Japanese yen.  The US authorities are still investigating the cause of the furore but the word on the street is that computer-driven trading models were to blame.  As the market fell they became ever more frenzied in their efforts to sell, even pushing the price of some shares temporarily to zero.

If investors were uninterested in the UK economic data they were scarcely more bothered about the Euroland numbers.  Some were unimpressive. France’s manufacturing sector purchasing managers’ index  went down as everyone else’s went up. German retail sales fell by -2.4% in March and sales for the euro zone as a whole were slightly lower.  Some were good.  German factory orders rose by +5.0% in March alone and industrial production was up by +4.0%.

But the focus was squarely on Greek firebombs and the inconclusive bailout package.  When EU citizens start murdering each other for political motives the market gets nervous.  By the end of the week that nervousness had abated somewhat.  Although the Greek mobs were still out there it seemed more likely that Europe’s leaders had at last bitten the bullet and decided to do something to patch up their collective finances.  Late on Sunday night they announced agreement – with the help of a small contribution from Britain – on a €750 billion safety net that would support not just Greece but any other EU country that found itself in a similar plight.

As always in these bailouts (this is perhaps the fifth in so many months, it is easy to lose count) the devil is in the detail.  Markets are inclined to be initially enthusiastic, becoming dubious as the list of conditions grows longer.  This latest effort looks more plausible than its predecessors because it has the backing of Germany (Mrs Merkel took a pasting in regional elections yesterday because of her support for it) and recognises that the problems of Greece today could affect the rest of Club Med tomorrow.

Nevertheless, and cynicism aside, last night’s agreement in Brussels looks much more like the Real Deal than any of its predecessors.  Sterling has had something of a free ride in the last couple of months that might now be coming to an end.  It is feasible that the European Central Bank could be buying Greek government bonds before the boys in Westminster hammer out a deal to shape the next parliament.

As for sterling itself, investors are hardly any wiser this morning than they were a week ago.  It seems likely that Mr Cameron will end up as prime minister but nobody can be sure.  If he does, and if a Lib/Con coalition can announce plausible measures to sort out the deficit, sterling could start to fight back.  If Mr Brown tries to soldier on without any prospect of a majority (for he has none) the pound will come under renewed pressure.  That uncertainly leaves little alternative other than to stick with a boring but prudent hedge:  Buyers of the euro should cover 50% of their requirement and review the situation once the shape of the new government becomes clear.

Visit our Currency page here

Tags: , ,


This entry was posted on Wednesday, May 12th, 2010 at 1:09 pm and is filed under Currency exchange . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.


Leave a Reply


Join our Newsletter!

For latest news and advice about buying property and living in France. Type in your email to subscribe.