Risk appetite was finally pared back this morning. Stock markets are lower across the board and EUR/USD crept back below the 1.4700 level. On the most part, the move away from risk has lacked aggression. Sterling, however, was slammed by a Daily Telegraph report that Lloyds TSB has failed to raise enough capital to meet the FSA's strict requirements. As a consequence it has reportedly been forced to abandon its plans to withdraw from the government's toxic debt insurance scheme.
The bad news on Lloyds Banking group comes just days after Moody's warned that UK banks could yet report around GBP130 bln of bad debts over the next year on the back of slow growth.
Lower than forecast growth could push this number higher. This problem, however, will not be limited to the UK banking sector. While central bankers are generally accepting that the recovery is in sight their outlook for growth is cautious and slow growth will raise the risk of more bad news. The prospect of more bad news in the months ahead may not just be confined to the banking sector. A series of US corporates yesterday warned about the difficulties associated with a jobless recovery. In view of the heady pace of gains in stock markets and risky currencies such as the AUD and NZD, and given the proximately of the G-20 meeting next week, this morning's profit-taking activity is not a surprise. AUD/USD pushed to 0.8556 before meeting with support, NZD/USD has fared better with buyers lifting it back to last night's close. Cable suffered a move aggressive move falling to 0.6300 before finding its feet. EUR/GBP rose to 0.9010 before sterling buyers stepped in.
UK data this morning highlighted the shocking position of UK government finances. While the PSNCR in August was not as bad as expected at GBP10.4 bln, the July revision meant there was no reason to celebrate. The cumulative PSNCR for the FY09/10 so far now stands at GBP 57.09 bln compared with GBP8.66 bln this time last year. In addition M4 data was not as strong as expected at 12.6% y/y which suggests that the impact of QE is not yet as great as had been considered likely. These data do nothing to soothe the raw nerves in the market over the possibility that the BoE may do more in its Oct or Nov policy meetings to stimulate the economy. That said, with the market now short of the pound, sterling will be vulnerable to corrective upticks going into next week's slew of UK housing data.
No US data is scheduled this afternoon.
