Burch Wealth Management Ltd 01.08.11

8/6/2019 Burch Wealth Management Ltd 01.08.11

1/3

Members of the St. Jamess Place Wealth Management Group are authorised and regulated by the Financial Services Authority.

The St. Jamess Place Partnership and the title Partner are the marketing terms used to describe St. Jamess Place representatives.St. Jamess Place UK plc: Registered Office: St. Jamess Place House, 1 Tetbury Road, Cirencester, GL7 1FP

Registered in England Number 262806

M a r k e t B u l l e t i nMONDAY 1 AUGUST 2011

Tel: 01437 766396

Website:www.burchwealthmanagement.co.uk

_This weekly Briefing Note aims to pick out some of the keyfinancial and economic issues impacting the markets overrecent days, and from time to time includes the views ofsome of our independent fund managers.

AAA-rated political system?

The week was dominated by the US, as President BarackObama was forced to issue an 11th-hour appeal for commonsense in a bid to end the impasse over the level of the US debtceiling. Late on Friday, Mr Obama stated, This is not asituation where the two parties are miles apart. There areplenty of ways out of this mess, but we are almost out oftime. If we are to lose our AAA rating, it wont be becausethe country is incapable of paying the bills, but because we donot have a AAA political system.

Where we stand on Monday, the world is a more optimisticplace after Barack Obama announced overnight that he hadagreed a deal to raise the countrys debt ceiling and cuts tothe deficit over the coming decade. However, it is importantto recognise that the deal may still face opposition in theHouse of Representatives, where conservative Tea Partysupporters and liberal lawmakers have already expresseddissatisfaction with the agreement. The Daily Telegraphreported that the plan involves a two-step process forreducing the US deficit. The first phase calls for around $900

billion in spending cuts over the next ten years, and the next$1.5 trillion in savings must be found by a special

Congressional committee.

Republicans had insisted on deep spending cuts before theywould consider raising the $14.3 trillion limit on US

borrowing, turning a normally routine legislative matter intoa dangerous game of brinkmanship. After weeks of deadlockand with the final outcome hinging on support fromlawmakers, Obama pressured Congress to pass the deal. Iwant to urge members of both parties to do the right thingand support this deal with your votes over the next few days,Mr. Obama said in a televised address at the White House.But the President, like Congressional leaders, noted that it

was not the deal he would have preferred but it was acompromise.

Financial markets in Asia showed the first sign of relief after thedebt deal was announced, with stocks and the US dollar risingwhile gold, the traditional safe haven, falling on the news. In theUK, and across Europe, equity markets opened up sharply, withthe FTSE 100 up 1.2% at the time of writing.

It is very difficult to know what will happen once the defaultdeal is signed. Speaking at the end of last week, JohnGreenwood, chief economist at Invesco Perpetual, commented,My opinion is that a deal will be done. Ideally a deal wouldhave been done already to facilitate the passage of legislation

before the deadline. However, that is obviously not the case.But even knowing whether or not Obama and Congress willreach agreement doesnt provide much insight as to the marketoutcomes. One reason is that globally there are many cross-currents at present, particularly the crisis in the eurozone,

which makes the US a relative safe-haven. Also, recent federalgovernment revenue streams have been more buoyant thanexpected, which may mean that the US government cancontinue to fund itself a bit longer than previously thought,even without raising the debt ceiling.

Default clouds the issue

While the potential default has been the headline issue formany, The Financial Times believes this is the tip of theiceberg, reporting that analysts believe only a credible deficitreduction can satisfy the ratings agencies and keep the US from

losing its coveted status. Whilst it looks as if a deal may come just in time to avoid a catastrophic default, Washington andinvestors will be closely watching to see if it goes far enough toconvince credit rating agencies to let the United States keep itsrating. The dysfunction in Washington, itself, could actuallycontribute to S&Ps assessment, with the worlds largesteconomy already tainted by the political squabbling that delayedaction on the debt ceiling until the last minute. A creditdowngrade would undermine confidence in US solvency, whichcould stunt economic recovery prospects and send negativeripples through the international financial system where US

bonds are bellwethers. China, holders of billions of dollars of

US debt, has called the situation financially irresponsible.
http://www.burchwealthmanagement.co.uk/http://www.burchwealthmanagement.co.uk/http://www.burchwealthmanagement.co.uk/http://www.burchwealthmanagement.co.uk/


2/3




Julian Jessop, chief international economist at CapitalEconomics, the City consultancy, warned that a default mightonly be averted at the cost of a shutdown of non-essentialgovernment services that could tip the US economy intorecession. He added that whatever happened over the nextfew days was unlikely to alter the fact that the US needed to

be put on a much firmer footing. This is what will ultimatelydecide the impact on financial markets, Mr Jessop added.The necessary fiscal tightening will be a drag on the US for

years to come, keeping interest rates and government bondyields low.

The worst case scenario of the US running out of money isseen as unlikely; but, after recent years, the UK Treasury haslearned its lessons and is keen to have contingency plans inplace should the US eventually default on its debts. TheMail on Sunday reported that George Osborne, theChancellor of the Exchequer, and Sir Mervyn King, theGovernor of the Bank of England, have held frequentdiscussions and want plans in place ready for immediateaction. It is thought that one of the options for Britain, and

indeed central banks around the world, might be to waive thenormal rules and allow banks to continue to treat US bonds astop quality capital, assets that currently form a core part oftheir capital buffers.

The week that was

The growing nervousness over the August 2nd gridlock causedmarkets to remain volatile throughout the week, while thedollar fell to an all-time low against the Swiss franc and goldhit another record high, at one point pushing above $1,630per ounce on Friday. The flight to quality left global equitiesnursing losses, with the largest weekly falls in more than ayear. The FTSE 100 fell around 2%, closing the week at5,815.2 and the S&P 500 more than 3.4%. European marketssaw decreases of 2.4% and Far East markets 3%. On thecurrency exchanges, it was the Swiss franc and Japanese yenthat took advantage of American woes. The brinkmanship onCapitol Hill also took its toll on US Treasury stock, as at onepoint the yield was higher than that offered by the Britishgovernment, whose austerity programme is designed to keepthe AAA rating and with it a manageable borrowing rate.

Eurozone taking a backseat

For once, the eurozone debt issues were not at the forefrontof peoples minds, though there were still developments asSpain became the subject of media speculation. The DailyTelegraph stated that Moodys warned that the Spanishwere facing another threat to their credit rating due to notonly its own economic problems but also its exposure to theGreek crisis. The agency has concerns over Spains fundingpressures, and the challenge of meeting its austeritymeasures in a weak growth environment. In addition, theInternational Monetary Fund underscored the concerns in its

regular report, saying that downside risks still dominate theeconomic outlook, and problems will need continued and

decisive policy action. The general opinion seems to be that theability of Greece to meet its obligations under the second

bailout package remains key to the longer-term stability of theeurozone.

Feeling the pinch

British households are suffering a tighter squeeze on incomesthan the US or Europe, according to The Sunday Telegraph,

due largely to the weakness of sterling. With real disposableincome reducing by around 3%, the additional pressure iscoming from rising prices for food and energy, which though aproblem worldwide, is exacerbated by the weak pound. TheBritish currency has fallen by around 20% against most majorcurrencies since 2007, increasing the cost of any imported item,and the country is enduring its biggest fall in spending power in34 years. Some economists believe that the Bank of Englandshould raise interest rates to strengthen the pound and reduceimport inflation, but the Monetary Policy Committee is stillexpected to leave rates on hold this week for the 29th monthrunning.

Official statistics last week showed the UK recovery is yet totake hold, with the country only able to grow 0.2% in thesecond quarter of 2011. Poor data will reinforce the marketsopinion that the MPC will not raise rates until the second half of2012, and any weakness in the economy will be compounded bysoaring inflation as scheduled household fuel price rises takeeffect. The paper opined that there is little the Bank can do tolower inflation as currencies only really appreciate in valuewhen markets believe the economy is strong, which increasescapital inflows. Norman Lamont famously attempted this onBlack Wednesday and ultimately failed.

Results week

The City will be poring over an expected mixed set of interimresults from the big five UK banks this week, looking for signsof potential job cuts and the impact of the eurozone crisis.HSBCs chief executive, Stuart Gulliver, has been reported to

be looking at 10,000 job cuts as part of a programme to saveover 2 billion per year. While headline figures such as HSBCsexpected $11 billion of pre-tax profit are eye-catching, analystswill be more interested in whether the eurozone crisis has

increased the banks borrowing costs, and whether customersare defaulting on their loans.

Royal Bank of Scotland and Lloyds Banking Group are expectedto reveal the damage caused by a combination of Greek debtwritedowns, market volatility, and huge charges to pay for mis-selling of payment protection insurance. According to TheSunday Times, the losses could be as much as 1 billion forRBS and 3 billion for Lloyds over the first six months of 2011,hindering the governments plan to reduce the taxpayersexposure to the pair. Although both banks are perceived to bethrough the worst of their problems, the figures are down from

the same time in 2010, after Lloyds posted a profit of 1.3billion, and RBS scraped a 9 million profit. RBS, which is 83%


3/3




owned by the taxpayer, is by far the most vulnerable toGreece, with a gross exposure of around 1.6 billioninherited through its acquisition of Dutch bank ABN Amro, aheavy investor in eurozone government debt.

Burch Wealth Management Ltd 01.08.11

Documents

Transcript of Burch Wealth Management Ltd 01.08.11