FinancialExpat's Blog

Homeowners in the UK are no longer using equity in their properties to finance spending on major purchases. Quarterly Bank of England figures on housing equity withdrawal showed that in the third quarter of 2008 homeowners effectively paid back GBP 5.7 billion of their mortgages. It follows a similar figure of GBP 2 billion for the second quarter of 2008 but contrasts sharply with the third quarter of 2007 when homeowners effectively borrowed an extra GBP 11.1 billion. The data shows that homeowners are concentrating on repaying their mortgage, rather than adding to their debts.

The pound may rebound from its worst year on record against the euro as investors start betting on a recovery in the UK economy. The UK currency will strengthen 14% against the euro in 2009, after depreciating 24% in 2008, based on a median forecast of 42 analysts and strategists surveyed by Bloomberg. "We will see some signs of life in the UK economy sooner than we do in the eurozone," said Henrik Gullberg, a strategist with Deutsche Bank in London. "Even though we might be far away from a rate hike in the UK, the focus for currency traders will shift to that sooner in the UK than in the eurozone." The pound ended last week at 96.10 pence per euro and USD 1.4580.

The Bank of England will have to follow the US Federal Reserve and Bank of Japan by cutting borrowing costs close to zero before the pound starts to recover, according to Neil Jones, head of European hedge fund sales at Mizuho Capital Markets in London. The yield on short sterling futures contracts expiring in March declined 65 basis points to 1.74% since the most recent interest rate cut by the Bank of England on 4 December indicating increased bets on further reductions. "The quicker the Bank of England bites the bullet and cuts to zero the quicker the pound can start to recover," Jones said. "They are just prolonging the inevitable." He further added that he thinks sterling may trade at parity with the euro in the coming weeks.

The spread of London interbank offered rates (Libor) for three-month dollar funds over anticipated policy rates fell to its lowest since the immediate post-Lehman period and three-month euro and sterling Libor rates were once again fixed lower, having fallen every session since early October. Analysts said the flood of central bank liquidity and myriad government banking guarantees throughout the fourth quarter have ensured there's sufficient cash available in the system to bring down lending rates, even though some banks are finding alternative methods of funding from traditional interbank markets, such as using the repo markets more efficiently.

Crude oil rose for a second day in New York following concerns that supplies of Middle Eastern oil may be disrupted and news that China intends to build its emergency stockpiles of oil while prices are low. Crude oil for February delivery rose as much as 5.6% to USD 39.82 a barrel on the New York Mercantile Exchange.

Instability in the Middle East has driven up demand for gold as a haven and hedge against inflation. Gold for immediate delivery increased to USD 882.44 an ounce in London. Gold may climb to USD 935 an ounce by the end of next week according to James Moore, an analyst at The BullionDesk.com in London.

Spotlight on Asia

Japan's stock market, down by more than half from 2007, is likely to experience a "dawn" in 2009 as the Japanese government supports small businesses and the US tackles the financial crisis, Credit Suisse Group wrote in a report. "We forecast 2009 will represent a dawn for the Tokyo market, a period before the return of the sunshine," Credit Suisse's Shinichi Ichikawa, chief Japan equity strategist in Tokyo, wrote in the brokerage's annual outlook report published last week. President-elect Barack Obama's "inauguration will have an immediate positive impact on Japanese stocks as he leads the US out of the financial crisis." The benchmark Topix index could rise as much as 42% to 1,200 by the end of the year, he said. The brokerage recommended staying "overweight" in defensive and domestic shares as the yen is likely to continue strengthening against the dollar and euro, depressing earnings for Japanese exporters.

Japan's Mitsui Sumitomo Insurance, Aioi Insurance and Nissay Dowa General Insurance are in talks to merge in a move that would create the country's largest non-life insurer. "Investors liked the merger news as it sparked hopes of greater profitability and less competition in the sector," said Yoshinori Nagano, a chief strategist at Daiwa Asset Management.

Singapore's expenditure on research and development grew by 26.5% in 2007 and equates to 2.61% of GDP. Private sector spending was USD 2.9 billion with the majority being accounted for by R&D connected to manufacturing. Yena Lim, managing director of A*STAR, said, "2007 has been exceptional...Singapore is fast building a strong base of R&D activities in the country. The Government's steadfast support of R&D activities has spurred the rapid development of this sector, and encouraged investors to make significant R&D investments here. Knowledge-based and innovation driven activities will allow our economy to be more resilient and create high value jobs for Singaporeans."

China has announced a pilot scheme to allow trades in the yuan. It is part of a package of measures designed to help exporters. Most of Chinese foreign trade is settled in US dollars or the euro, leaving exporters vulnerable to exchange rate fluctuations. The yuan is not yet a freely convertible currency but is already being used in some South East Asian countries, such as Vietnam. The scheme, when it is launched, will allow the yuan to settle trade between parts of eastern China and Hong Kong/Macau and between south-west China and the Asean group of countries.