Although the news out recently did not seem to be too worrying as far as the UK was concerned, it was a week which felt a bit like a dormant volcano. It appears that as the week progressed there was more and more chance of a renewed recession, which is instilling fear into the economy and into sterling. Last week we saw GBPEUR drop from 1.22 point to today’s circa 1.19, a clear sign that there is something circling in the waters below our lilo.

Last week I spoke about the housing market which is continuing to worsen, since then there has been even more reason to start sweating over the dreaded ‘double-dip’. Mainly the CIPS/Markit reports on manufacturing, construction and services for August came out depressingly. Which was not necessarily a catastrophe but was disappointing as previous manufacturing figures this year have been strong. This is similar to the construction sector 6% slowdown, not that we were expecting manufacturing and construction to be the figurehead of the recovery.

The true hit was when the main business activity index fell in August from 53.1 to 51.3 and therefore dropped to its lowest level since April last year. Although above 50 is still good, the levels would need to be near 5.2 to show services output increasing. In conclusion, with the three big guns of the economy slowing together it seems as if the recovery has come to a halt!

This week will have some data releases which will show if the recent bad news will already have had an effect on Q3 data. The fact that the reports tend to be a few months in front of the hard data may mean that there is a bit of an expansion in GDP in Q3 but should the reports continue to slow in the next few months the economy contraction may prove to be a serious issue in Q4.

In other news, Osborne has announced that he is going to scrap the pre-Budget report this year to begin the return to a more typical economic policymaking. The ditching of the second annual budget will also save resources in the Treasury, as all the focus is to go on the October spending cuts.

Good luck for those of you trying to make it home tonight midst tube strike chaos.


Jeremy’s Trade of the Week

This week’s trade of the week is not a particular strategy or structure but simply the advise to hedge.

We believe that sterling is likely to lose ground in the near term as the October spending review looms in the distance. We doubt that the market will be willing to back the pound in the weeks before the announcement much like it did prior to this year’s election. Near term targets for GBPEUR are 1.18 while for GBPUSD are 1.48. We would suggest that a mixture of forwards and options are the way for the average corporate to deal with these moves as both protect against GBP falls while the option component provides the ability to benefit from upside.