Welcome to Neil MacKinnon's Market Commentary blog. This page is updated regularly to cover events impacting the global financial and currency markets.

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The latest data on UK consumer confidence just released shows a decline in the readings for July ( to minus 22 from minus 19) and adds to worries about the prospect of stagflation for the UK economy something Mervyn King alluded to in testimony to the Treasury Committee this week. Of course, the Bank of England has an unfortunate history of under-estimating inflation and Mervyn has had to write 14 letters to the Chancellor “explaining” why inflation has overshot the official inflation target. Being lumbered with one of the highest inflation rates amongst the major economies alongside one of the weakest economic recoveries is certainly unfortunate. The MPC meetings in the months ahead should be more interesting than usual. However, the global backdrop does not look helpful and the latest numbers on American economic growth released later today will show that despite zero interest rates, quantitative easing and a massive fiscal stimulus, the economy is slowing down. Alongside, a cooling in the hot pace of Chinese economic growth (and China has been the locomotive for the global economy) the prospects for exporting countries like Germany don’t look great. Add in a dose of tighter fiscal policy, you can see why the rest of 2010 starts to look “unusually uncertain” as Mr Bernanke is quoted as saying. Where does this leave sterling? The last few months have favoured sterling for sure. Investors have given the “thumbs up” to the Chancellor’s budget policy but the real test will be political will if the economy starts to get badly affected. The sterling-dollar exchange rate is bumping into a key technical 50% retracement around 1.5600 and it would be no surprise if this retracement level stops sterling’s advance for now against a dollar which has had a bad July. Don’t assume that August will be a quiet holiday month either…things happen when they are least likely to.

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Mervyn King likes being miserable and his testimony to the Treasury Committee yesterday provided little cheer in terms of prospects for the economy. The influential and respected forecasting organisation, NIESR, released their latest set of economic forecasts yesterday which sees the 1.1% increase in GDP recorded for Q2 as a ‘blip’. For the rest of the year they are very downbeat and for next year see growth of just 1.7%. This morning’s latest money supply data is not helpful either. M4 lending growth edged down to 2.4% while net consumer credit fell by £98m in the month and mortgage approvals declined to 47.6k from 49.5k. Well-known monetarists like Professor Tim Congdon have been focusing on the very low rates of money supply growth, not just here but also in the US and the eurozone. He believes, rightly in my view, that these rates of money supply growth are too low to sustain adequate rates of growth in nominal GDP. If anything, central banks should do more to ensure stronger rates of growth in money supply through more quantitative easing if needs be.

As far as the FX market is concerned, sterling remains firm in what seems to be a fairly quiet market. The US dollar has slipped back as US economic data continues to be on the soft side. Tomorrow’s GDP data will be important as it will likely show that the pace of recovery is slowing. The euro hasn’t really gone anywhere but euro money market rates continue to edge higher, suggesting that the stress tests have not resolved the freezing up of the interbank market and the problem of counterparty risk. As much as the eurozone’s policymakers would like to think they have resolved all these issues, there is a real danger that they are just delaying the day of reckoning.

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Sterling is holding onto its gains and is making a three-month high against the US dollar. To some extent, sterling has benefited by avoiding the limelight of the eurozone bank stress tests as well as the focus on the slowdown in the US economy that is taking place for the moment. In addition, the Chancellor is being given the benefit of the doubt and the market is welcoming his plans to aggressively tighten fiscal policy. It is up to the Chancellor to deliver without capsizing the economy. So there has been little talk in the markets about the possible loss of Britain’s triple A credit rating or potential problems to do with foreign investors avoiding gilt-edged securities (UK government bonds) like the plague. In fact, the truth is very different and, as I have mentioned before, foreign investors have been significant buyers of gilts which largely explains the strength in sterling in recent months. In addition, the FTSE100 share index is down only 4.8% year-to-date on a currency-adjusted basis which is pretty good when you consider the French stockmarket is down nearly 16% over the same period.

In the aftermath of the eurozone bank stress tests, the financial markets seem to be in a mood to believe anything which is always a dangerous sign. Complacency might not last the summer and the credit markets are taking a different view, warning that the economic outlook is one of deflation and economic slump. Somebody has to be wrong…is it the bond market or the equity market? In the UK, inflation has tended to be higher than the other major economies and deflation risks are less of an immediate problem it seems. It is more important to ensure that the economy moves on to a firmer footing and tomorrow’s testimony before the Treasury committee by the Monetary Policy Committee promises to be interesting.

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Last Friday’s stress tests for the eurozone banks were unveiled with great fanfare but no one, apart from the usual band of euro cheerleaders, really believes that they are anything more than political whitewash. For a start, the tests were not that ‘stressful’ and did not include a scenario of sovereign debt default. In addition, the financial support previously provided by governments was included in the definition of tier 1 capital, without which there would have been a much higher failure rate (about 50) than the 7 that were deemed to have failed (out of 91). So far, the market reaction has been muted but the real ‘proof of the pudding’ will be the ability of the eurozone banks to fund themselves in the market. So far, they have not been able to do that and they have been heavily reliant on the ECB for liquidity. The stress tests don’t change that. And if it is all whitewash’ then the markets will punish those banks who are trying to massage their books.

As a result, I continue to think there is plenty of market volatility in the pipeline. July’s rally in equity markets could end with a nasty bump. In addition, it is difficult to see how the euro can make any sort of serious appreciation on the back of stress tests lacking in substance. The fact is a number of European banks hold a lot of asset-backed securities that were part of – and central to – the credit crisis. In fact, the banks’ holdings of sovereign bonds might be their best asset. A study by the Federal Reserve called Shadow Banking (click here) is something I recommend for anyone who wants to understand the complex intricacies of the derivatives market and the role played by the banks. Indeed, the Fed’s study contains a special focus on the role played by the German Landesbank (no word on any of this from the EU regulators…surprise, surprise).

Back to the UK where sterling-dollar is at a three-month high. This morning’s Hometrack house price data featured a 0.1% dip in July, but the weekend press contained plenty of bearish commentary on UK house prices. I am not sure I believe that, as low interest rates will only plant the seeds for the next real estate bubble. It’s only if the economy is in a ‘black hole’ and unemployment starts to rise again that one should worry in the near term. This week’s CBI distributive trades survey will be an important indicator in assessing the state of the UK consumer after last week’s unexpected 1.1% increase in real GDP.

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This morning's release of UK GDP data for Q2 reported a better-than-expected increase of 1.1% led by services and construction with the latter rebounding by 6.6% (presumably weather-related). Mortgage approvals dropped though and suggest that the headline GDP number overstates the real strength in the UK economy. Remember that even the Bank of England's chief economist was fairly downbeat in his comments earlier in the week as far as prospects for the economy are concerned. Nevertheless, the GDP data was enough to bump up the sterling-dollar exchange rate out of its 1.52-53 range to nearly 1.54.

Elsewhere, I was startled to see the ECB's Trichet calling for more global austerity in this morning's FT (click here). Incidentally, this is a view that is not shared by Ben Bernanke, who said yesterday some degree of fiscal stimulus is preferred to keep economic growth on track. The much-awaited eurozone bank stress tests (to be published later today) are unlikely to spring any surprises as the tests are unlikely to be stressful enough to spark any failures. As a result, there is likely to remain a degree of suspicion in the markets that EU policymakers are trying to defer potential problems. Transparency and full disclosure are not the hallmarks of eurozone financial policy.

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Spencer Dale, the chief economist at the Bank of England, says that the economy faces a ‘triple whammy’ of slower growth, rising unemployment and higher inflation (click here for his interview in this morning’s Independent). His comments are not very encouraging and suggest that there is little appetite within the Monetary Policy Committee for a near-term rise in interest rates. Admittedly, this morning’s retail sales data was encouraging with a 0.7% increase being reported for June though a large part of the increase reflects the impact of the World Cup tournament. But with fiscal policy being squeezed, consumer confidence is unlikely to be robust as people worry about their jobs.

Otherwise, stockmarkets reacted negatively to Ben Bernanke’s comments yesterday evening that the US economic outlook is ‘unusually uncertain’. That is for sure, and recent numbers on the US housing market in particular have been dire. That might be a warning signal for the UK economy and certainly there is no doubt that the American economy is slowing down. Sterling has not been unduly affected by all of this but remains stuck around the 1.52-53 level that it has been trading against the dollar for most of this week. The main focus for the markets now shifts to tomorrow’s release of the eurozone’s stress tests for banks. It looks like everyone will be a winner but there is a real issue of credibility. My guess is that the banks need a lot of capital and I remain unconvinced that the so-called stress tests will prove very meaningful.

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The main focus for the financial markets today is Ben Bernanke’s semi-annual monetary policy testimony to Congress later today. Mr Bernanke faces an uncomfortable situation with recent economic data showing that the recovery is slowing down. In particular, the US housing market seems to be getting worse rather than better. The last thing Mr Bernanke (or any of us) needs is an economy slipping back into a deflationary recession and it is worrying that despite all the quantitative easing and fiscal stimulus, the economy is just not able to sustain a recovery. This begs the question as to whether more of the same will actually work. I am not sure anybody has the right answer to that question but in the absence of any feasible alternative it looks as though Mr Bernanke has little option but to stick with policies that are designed to try and generate economic recovery. That means an extended period of low interest rates if not a return to the printing presses in the event of a sharp deterioration in either the economy or the equity market.

Here in the UK, there is a danger that we might face similar economic prospects, something the Treasury Committee alluded to in its latest report (click here) when it mentioned in its conclusions that there was a risk of near-term negative growth. At the risk of sounding like a broken record, I remain unpersuaded of the need for higher interest rates when there is so much economic uncertainty about.

In the FX market, there is not a great deal to report and sterling has not advanced beyond 1.52-1.53 against the US dollar. The market’s main focus is still with the euro and the reaction to the much-awaited ‘stress tests’ for eurozone banks which will be published on Friday.

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The latest data on the government’s public finances reported a deficit of £14.5bn in June, slightly worse than market expectations of around £13bn. However, there is a glimmer of hope with the fiscal year-to-date deficit amounting to £40.3bn from £40.9bn, so it’s a slow but gradual step in the right direction. More worrying was the latest money supply data which showed that lending growth was 2.4% in June which was the slowest on record. It just highlights both the weak demand for credit as well as the unwillingness of banks to lend. The Bank of England can’t ignore this data or ignore the fact that money supply growth is still very sluggish. You don’t have to be a fully paid-up monetarist to acknowledge that low rates of money supply growth imply low rates of inflation over the medium term. That is why I find it difficult to accept or be persuaded by the case that interest rates in the UK have to go up.

In the FX market, sterling is around 1.52 against the US dollar but has been stuck around that level the past few days. However, sterling has lost ground against a resurgent euro which this morning hit 1.3000 against the US dollar and 0.85 against the pound. My guess is that the euro’s rally doesn’t have much further to run. No doubt we will find out on Friday afternoon that, amazingly, 99% of the eurozone banks have ‘passed’ the so-called stress tests. I am pretty sure the markets won’t be convinced by the best efforts of the euro spin doctors that everything is all well and good. In which case, the euro can slip back. Otherwise, sterling/Swiss is consolidating around the 1.60 level and, despite a very strong yen which is starting to come to the attention of the Japanese authorities, sterling has held up reasonably well above the 130 level.

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Equity markets are nervous. Last Friday’s fall was triggered by a plunge in US consumer confidence which was just the latest in a string of economic data which is showing that the US economy is slowing down. Even the Fed is acknowledging this and Ben Bernanke presents his semi-annual monetary policy testimony to Congress on Wednesday. The bottom line is that there is little chance of American interest rates going up anytime soon. If anything, the Fed might have to consider wheeling out the printing presses again and come up with a fresh round of quantitative easing. Given that the Chinese economy is slowing down, it is difficult to see thee eurozone economies escaping the slowdown, given that the recent improvement in industrial production owes more to an export revival (courtesy of a weaker euro) rather than burgeoning domestic demand. Indeed EU policymakers are intent on pursuing fiscal austerity as the recent suspension of talks with Hungary at the weekend make clear. This doesn’t stop the massed bands of euro cheerleaders from welcoming such moves or trying to paint a ‘blue-sky’ scenario for eurozone prospects. The so-called bank ‘stress tests’ scheduled to be published at the end of this week will, in fact, not be stressful at all as EU policymakers seem intent on putting the best possible spin on the ‘health’ of the eurozone banking system. The truth is likely to be very different, which might un-nerve the more savvy investor.

As far as the UK is concerned, the latest report on house prices reported a 0.6% drop in the month and some commentators think further falls are in prospect. Also, the forthcoming MPC minutes will be of interest, particularly if Mr Sentance is joined by others wanting interest rates to go up. I think this would be a big mistake. The two economic super-powers in the global economy are slowing down. Fiscal austerity is the order of the day in the eurozone and the UK. Deflation – rather than inflation – is the main concern. My advice to the Bank of England would be to keep monetary conditions loose. It is way too early to think about tightening policy. If anything, the financial markets could be in for a very bumpy ride in the weeks ahead, so caution is the watchword.

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Sterling got a boost from the dollar’s woes with the exchange rate lifting to 1.54. Recent economic data out of the US has been poor and suggests that the US economy is slowing down. Certainly, the Fed is more downbeat than it was and this week revised down a touch its economic growth forecast for this year and lifted its unemployment forecast for next year. In addition, inflation edges lower as today’s CPI numbers will almost certainly confirm and this raises the spectre of deflation, something that Fed boss, Ben Bernanke, is keen to avoid. As a result, the Fed has no choice but to leave interest rates unchanged for some time perhaps even resorting to the “printing presses” again in order to avoid a Japan-style “lost decade”. Bernanke admitted this week that it could take several years before the US economy gets back to normal. This all sounds like a “depression” rather than “recession”.

No wonder that shorter term bond yields in the US fell to a record low yesterday. Yet, equity markets edge higher as firms like Intel and JPM beat earnings estimates. I am not sure what the equity markets are discounting in terms of future economic scenarios but it is clearly not the deflation/depression scenario that the fixed income markets are contemplating at the moment. So one market must be wrong and I think it could be the equity market. I am also mindful of the 18 year cycle in the housing market something which commentators like Fred Harrison and Steve Hanke have brought to our attention. A period of low interest rates (BoE take note) will surely set in train the next housing bubble which is then scheduled to burst in 2027-2028. In the meantime, the UK economy is in danger of imitating what is happening in the US at the moment…dented hopes of an economic recovery,  disappointingly high levels of unemployment and lower (not higher) inflation.

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Better jobs data in the latest numbers released this morning with the claimant count down 20,000 in June and the ILO unemployment rate edging lower to 7.8% from 8.0%. Average earnings growth (excluding bonuses) dipped to 1.8% from 1.9%, so where is the wage inflation? Mr Sentance (Bank of England Monetary Policy Committee Member) is banging on again about the need for higher interest rates but, as you know, I think this is unnecessary as the economy and the housing market (plenty of bearish stories in last weekend’s press) are not strong enough to withstand a dose of higher borrowing costs combined with draconian budget cuts. Sterling doesn’t mind though, and is above 1.52 against the US dollar this morning.

The currency market seems to like what Mr Osborne is doing and, in the absence of any nasty economic news stories, seems prepared to buy the pound. On the other side of the pond, the economic picture is less rosy and this evening’s FOMC minutes are likely to feature a downgrade to US economic forecasts for this year. Things don’t look great with the US housing market in the doldrums and US consumers still cautious, especially as the jobs market looks sticky. The Fed has little option but to keep US interest rates lower for longer and it cannot be ruled out that the Fed might have to reconsider opening up its quantitative easing programme again. Maybe what is happening in the US provides lessons for us in the UK.

If you want to know where the action is, it is in Asia. The latest GDP data out of Singapore highlighted an annualised growth rate of 26% in Q2. Exports are booming and are expected to run at 17-19% this year. China publishes its GDP data tomorrow and it would be a surprise if growth dropped much below 10%. China and Asia have acted as the growth ‘locomotives’ for the world economy over the past year and we need them to keep steaming along otherwise we are all in trouble.

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The latest inflation numbers were published this morning and inflation moderated to 3.2% from 3.4%. Slightly disappointing, but some of the inflation reflects the impact of previous tax measures and the lagged effects of the previous depreciation in sterling. Inflation in the UK is relatively high when compared to inflation rates in the US or eurozone but there is a good chance that inflation will decline rather than increase in the months ahead. It would certainly be a mistake in my view to start raising interest rates now, especially with so much fiscal tightening in the pipeline. Underlying money supply growth is not strong enough at the moment to trigger an upsurge in inflation over the medium-term.

From a global perspective, deflation rather than inflation is the main risk which is why longer-term interest rates, as represented by 10-year bond yields, are at their lows for the year (and this includes the UK). Sterling did not do a great deal on the back of the inflation data and is currently around 1.51 against the US dollar and 0.83 against the euro. Sterling/Swiss is starting to look interesting, especially as the strength of the Swiss franc continues to pose problems for the Swiss National Bank (SNB). This is creating deflationary pressures and potential problems for economic growth. The SNB has already intervened in the currency market quite massively this year but without success. It is likely that the Swiss franc has been the beneficiary from a flight of deposits out of fragile eurozone banks during the recent uncertainties surrounding eurozone government debt (Portugal was downgraded by Moody’s this morning) and the adverse impact that this has on eurozone banks (particularly French and German banks who are the biggest holders of ‘Club Med’ debt). It is unclear that the SNB would want to intervene again on such a scale but you could not rule out the possibility of the SNB adopting ‘negative’ interest rates as they did in the 1970s. If they did this, there would be a very good chance of reversing the uptrend in the Swiss franc. The ECU Investment Team is currently very focused on the potential for the Swiss franc to weaken in H2 2010, and is probing with small positions to try to finesse timing.

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Yesterday’s Bank of England policy meeting turned out to be a non-event as did the European Central Bank meeting the same day. Industrial production rose 0.7% in May but merely offset a drop of 0.7% in the previous month. The Halifax house price index dropped 0.6% in the month of June after a downwardly revised 0.5% in May. NIESR’s estimate of GDP for the three months to June was 0.7%, easing from the 0.9% posted for the three months to May. This morning, the trade deficit widened out to £8 billion and both producer output and input prices fell by 0.3% in June. So not a particularly impressive picture and the producer price data suggests that inflation pressures could be easing.

Certainly, there is not much sign of inflation elsewhere in the major economies (Asia and emerging markets excepting) and, if anything, deflation remains the key risk. Signs of rebalancing in the UK economy remain distant and forecasts of economic growth for this year suggest that activity is likely to be below trend. This is why I continue to recommend that the Bank of England keeps its options open. Siren voices advising an early increase in UK interest rates are mistaken in my opinion. There is plenty of pain and readjustment ahead in terms of the Government’s plans to tighten budget policy. As far as sterling is concerned, there has been a decent move against the dollar over the past month or so but, at this particular juncture (between 1.51 and 1.52), it is unclear whether sterling has the legs to continue much further. The US dollar has admittedly been under pressure as recent economic data has been on the soft side while the euro has benefited from better industrial production numbers out of Germany and France (courtesy of this year’s depreciation in the euro). But again, there is still the potential for plenty of event risk in the pipeline over the rest of the summer whether it be a Greek default or eurozone bank bust.

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A big day for interest rate and monetary policy decisions from both the Bank of England (BoE) and the European Central Bank (ECB). I have said before in my blog that at the very least the BoE should keep its options open. Although I am not a fully paid-up ‘monetarist’, I do take heed of what the money supply aggregates are saying and the message is that money supply growth is not strong enough to support adequate growth in nominal GDP (or, in other words, the economy). The same message applies (perhaps more so) in the money supply data for the US and the eurozone. While all eyes are on fiscal policy, I think it is a mistake to ignore the monetary aggregates – which is why I think that the BoE must retain the option of expanding its quantitative easing programme and ignore recommendations to raise interest rates. I think also that, given all the problems in the eurozone, the ECB will inevitably move towards full-blown quantitative easing too.

In the FX market, sterling has held up well against the US dollar and this morning is nearly at 1.52. Whether it can go up much more is unclear at this juncture as it has as much to do with the prospects for the US dollar as well as those of sterling. Recent US economic numbers have tended to be disappointing and suggest a slowdown in US economic activity during the second half of this year. There has been some talk in the market that the Fed might have to do more quantitative easing. Certainly, any interest rate hike from the Fed seems a long way off. Against the euro, sterling has pulled back from the 0.80 high seen on 29th June and is at 0.83-0.84 this morning. The euro has recovered because the ECB’s provision of liquidity is actually starting to diminish which is forcing short-term eurozone interest rates up ever so slightly. In addition, economic data out of Germany (especially exports and industrial orders) has tended to be fairly upbeat compared to the US and this has all combined to squeeze out short positions in the euro. I can’t see the euro extending too far as I am not convinced that the latest stress test methodology is realistic when it comes to assessing bank losses in terms of their holdings of sovereign debt. A Greek default and a European bank bust are still on the cards and the next month or so might be a bumpy ride for the markets.

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A report in the FT this morning (click here) that European commercial banks have been engaging in gold swaps with the BIS (the central banker’s central bank) highlights the ongoing funding pressures facing the banks (they have effectively been selling their gold reserves to raise cash in order to help their funding). It might also explain recent slippage in the gold price. Markets remain volatile though, and the recovery in stockmarkets yesterday just looks as though it was ‘technical’ in nature and arising from an ‘oversold’ position. The bulls are still nervy and with investors worried that the global economy might enter a phase of deflation and economic slump, markets look set to remain volatile in the months ahead.

I have just re-read Ben Bernanke’s famous speech from 2002, “Deflation: Make Sure ‘It’ Doesn’t Happen Here” (click here). This is an important speech as it laid out what the Fed would do to stop deflation. At the time, it looked a very improbable scenario and of more relevance to Japan and its ‘lost decade’, where deflation is still a problem today. But it did explicitly lay out the various policy options the Fed would use in such a scenario. Of course, little did we know that the banking and financial crisis would come along five years later and trigger a severe economic recession with the attendant worries of deflation. Core CPI inflation in both the US and eurozone economies is just below 1% at the moment and I have seen Fed research which shows that (for the US) the 10-year expected inflation rate is 1.84%. No wonder longer-term interest rates are edging lower. Here in the UK, inflation still seems a problem but we might find it difficult to avoid a global slump and deflation. As I mentioned yesterday in my blog, it means that the Bank of England, in its deliberations, needs to understand the dangers of going along with Mr Sentance who wants to raise interest rates here in the UK. They should keep their options open. The coast is not yet clear.

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Could the Bank of England start up its programme of quantitative easing (QE) again as early as this Thursday's MPC meeting? Don't rule it out, as against a backdrop of a slowing global economy and volatile financial markets, there is a risk that monetary policy is becoming too tight. If that sounds odd when interest rates are practically zero, then you should take a look at what is happening to money supply and credit growth. M4 money supply growth is on a declining trend and is growing by less than 4% year-on-year. The growth rate would likely be much less than that if it was not for the QE already carried out under the Bank's Asset Purchase Facility. With fiscal policy now being tightened aggressively, there is a real danger that the economy fails to stage a recovery.

The same story applies to America where there are increasing worries about the precarious fiscal position of the individual states like California and Illinois. The credit default spreads here are on par with Greece and Spain. In addition, event risk during the summer is still high. I would not be surprised to see a major European bank go bust, Greece announce a default and BP go bust. BP has large and complex derivatives structures which could make for a severe liquidity problem in financial markets. It is no wonder that the Times newspaper this morning is reporting that the UK government is worried about BP. In this scenario, central banks would have to embark on more QE to ensure that global liquidity does not dry up completely. So Thursday's MPC meeting might not be a non-event after all.

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Last Friday’s US jobs report did not make for pretty reading and soft jobs growth (click here) highlights what looks like a half-speed economic expansion in the US economy. Already economic forecasters are downgrading their US economic growth forecasts for the second half of this year as the impact of previous fiscal stimulus measures fade. There is much debate amongst economic forecasters whether the US (and the global) economy is set to enter a so-called ‘double-dip’ recession or, if you read Nobel prize winner Professor Krugman’s blog in the New York Times, a ‘Third Depression’ (click here). My guess is that a depression is unlikely but there is no doubt that the recovery so far has been pretty anaemic (including the UK economy) and that this is the price you pay for the credit bubble and banking crisis.

Deleveraging and pay-down of debt takes time and until balance sheets are repaired then we are stuck with below trend rates of growth and relatively high levels of unemployment. For the debt-stricken economies like the US and UK, it means that policymakers must tread carefully. In the US, I think there is little chance that The Fed will raise rates this year or next year. The 2-year US Treasury yield is actually at a record low and effectively discounts a bleak scenario of deflation and economic slump. Here in the UK, weekend press reports featured stories of more Budget cuts. So far, the financial markets have given the ‘thumbs up’ to the new government’s fiscal strategy. This is reflected in the rise of sterling over the past few months. Roger Bootle, the veteran city economist, argues in the Daily Telegraph (click here) that the government should be careful that the rise in the pound does not derail the economic recovery. He favours an explicit currency policy and actual intervention should the pound rise too strongly. I am not sure about that as the UK has an unfortunate history when it comes to targeting the exchange rate (remember the Snake, Lawson’s shadowing of the Deutschemark and, of course, the ERM). In the interim, the Bank of England’s Monetary Policy Committee meet this week. Andrew Sentance remains the dissenter in favour of higher interest rates. However, I think the global economic and financial market picture remains very uncertain. The Bank of England should keep its options open and ensure that the economic recovery is not undermined by talk of higher interest rates at a time when fiscal policy is being aggressively tightened.

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All eyes in the financial markets today on the latest monthly US jobs report. The last few weeks have seen a consistent flow of disappointing economic data out of the US. A poor report today which features a downturn in employment would just bolster the view that the economy is heading back into recession. This would unsettle further the financial markets, particularly stock markets, which have been under steady downward pressure. Obviously the hope is that the jobs report contains good news but there is plenty of event risk out there ranging from a Greek default, a eurozone bank failure and even a restructuring of BP debt derivatives that threatens more market turmoil. In the FX market, liquidity is tight though interestingly euro$ is a bit firmer. I wonder whether the Chinese are buying Euros behind the scenes as some sort of deal to dissipate wider volatility. Sterling seems to be holding up well though I do not see much preference at the upcoming Bank of England meeting for a hike in interest rates. This is not the time to even be thinking of such action at a time when there is so much uncertainty in the global economy and global financial markets.

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Well it is certainly proving to be a hot summer for financial markets. Stockmarkets have taken a hit and it looks as though there will be more pain. Investors are worried about a number of things ranging from a eurozone bank bust, a Greek default and the onset of deflation and economic slump. Recent economic data has not made for pretty reading whether it is from America, China or the UK. The next phase looks like we are entering the infamous "double dip" and it is no surprise that investors are fleeing for "safe-havens" like cash, short-date bonds and out of equities.

In the currency markets, it is times like these that favour the Swiss franc and yen (in terms of currency appreciation). Sterling has done reasonably well so far but there is always the risk of some unexpected upset. I don’t see how the BoE can think of raising interest rates in this environment. In fact, all the major central banks have more work to do by preventing the nightmare scenario of deflation and depression.

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