Monday 14 July 2008

Above all else the only real story last week was the surging oil price and collapsing stock markets. The key drivers in oil were geopolitical and in the stock markets, Freddie and Fannie. Surprisingly, just 24 hours earlier, Bernanke and Paulson had claimed that these institutions were solid but obviously the market disagreed as both opened 50% lower on Friday morning. By the close, at least, Freddie Mac was denying any problems and this helped both to recover in after hours trading.

Forex, having had a very slow start to the week, picked up as the collapsing stock markets drove the carry trade lower by Wednesday, only to be reversed again on Thursday by Paulson and Bernanke's testimony. It feels that the Euro is starting to gain a safe haven status in times of stock market falls as it has started the push to remove the highs at 1.60.

The collapse of the US Dollar on Friday will certainly be the headline of the week especially as it is a trend that looks likely to continue.
We feel that the protracted period of consolidation at this higher ground for the US Dollar now looks more like a permanent top rather than a consolidation for a US Dollar return.

Sterling has performed in line with the US Dollar weakness and whether this is a temporary rally that once again fades remains to be seen. It looks certain that the UK is just as exposed to the US style risks but Sterling, at this time, is not showing this affect.

This week has inflation at the core of the weekly statistics with various kinds of data from all of the major economies. However just as important will be the retail sales data released from the US and the UK.
The UK retail sales were 3.5% last time but this did not tally with the high street. In the US the main question is whether the tax rebates are still driving the consumer or whether this has already faded away.

Overall, however, the main focus will still be the oil price and stocks, with the crippled US dollar driving oil and inflation. Will the Fed make another cut in rates for the wrong reasons?  We believe that the stock markets, along with Freddie and Fannie, could well influence that decision.

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