UK to follow the US?

US stocks have received a slight boost as oil prices retreat and new home sales unexpectedly rose on a month on month basis. However, we shouldn’t really read too much into this, as there is a margin for error in these figures and new home sales in the US are still down 42% year on year. In addition, the Case-Schiller benchmark house price index is now showing a record decline of 14%. During the early 90s housing recession, this figure reached just -2.8%, which is a real indicator of the absolute capitulation in the US housing market. Predictions of double digit losses for the UK housing market may not be far off the mark, especially in light of recent house price data showing record month on month falls.

There isn’t the immediate connection between UK house prices and the FTSE as there is with oil and equities at the moment. Before the credit crunch broke, US house prices were on the retreat, yet stock markets continued to rally. Oil currently has a more immediate relationship with equity performance because of its daily volatility and that fact that many traders have already moved to price in a UK housing slump. The banking sector itself however, does have more significant correlation between house prices and share prices. Banks were amongst the worst performing sectors last week as fears of repossessions and negative equity caused many to question the values of their loan books. RBS also dragged the sector down with rumours that its rights issue would fail.

The FTSE finished the week below its European peers and well below US markets, who actually managed a decent gain on the week. In the US, the Nasdaq led the charge with Google up on encouraging pay per click data. Ironically, it may have been lower oil prices that hit the FTSE hardest last week. Oil finished down, around $8 from the peak of $135, sending oil majors such as BP and Shell lower over the reduced trading week. Financial stocks contribute around 25% of the FTSE’s total weighting and Oil & Gas stocks aren’t far behind at just under 20%.

While there is still scope for oil to at least contain its price inflation, there is a long way to go before the impact of high oil prices is nullified. Today’s pull back was welcomed in the short term by traders, but the realisation is setting in that sky-rocketing oil prices have left a trail of inflationary destruction in their wake that won’t disappear over night, even if prices dip back below $100.

The stand out announcements next week revolve around interest rates. On Thursday, the BoE’s Monitory Policy committee will announce the latest headline interest rate decision. A rate cut seems to be off the cards given recent comments from Governor King. The most likely decision will be to keep rates at 5%, there is always a small potential for upside. In Europe, the ECB has been taking a stronger line on inflation for longer with the German central bank calling for rate hikes. Elsewhere we have important employment data from the US on Friday on top of top tier manufacturing data earlier in the week. The Halifax house price index is tentative for some time on Tuesday, an announcement that could cement the UK housing decline.

The GB Pound/ US Dollar exchange rate, known as ‘cable’ was virtually unchanged over the week, but given the raft of announcements due on both sides of the pond, there could be some significant movement next week. An ‘Up or Down’ trade with BetOnMarkets.com wins if either of two barrier levels are hit within the specified time. An Up or Down trade on GBP/ USD to touch either 1.9454 or 1.992 within the next 10 days could return 11%.

Name : Mike Wright
Address: Regent Markets (IOM) LTD
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