World Bank downgrade snaps the recent risk driven rallies.

Yesterday the World Bank predicted that the global economy will contract 2.9% this year compared to their previous forecast of a 1.7% decline. This caused a seismic shift in the markets as the wave of risk driven rallies crashed and petered out as concerns that recent "green shoots" will not be sustainable. The effects in the markets were significant; equities were driven lower- the S&P down 3%, Nikkei down 2.8% and the Dow falling over 2%. Oil and Commodities tumbled as investors jumped into safer harbours; Oil fell 4%, Copper over 5% and Gold hit its lowest level since mid-May. In the currencies the moves were very apparent…we saw the AUD unwind significantly against the USD and the CAD also offloaded recent gains retreating to over 1.15 against the USD. So the big losers were the commodity driven currencies and the main gainers being the "safe haven" currencies namely the USD and Japanese Yen. So did the market get ahead of itself? It is hardly surprising that we have hit a barrier in the drive for recovery; it would be naïve to think that we would see a "V" shaped global recovery and in fact that we could even predict a recovery in such uncertain and unchartered conditions. The mood was not helped by the fears of banking issues in the Eurozone and concerns over German debt…look out for the ECB’s first auction of one-year funding tomorrow…as the auction is open to foreign banks along with European banks this could lead to funds moving out of euros into other currencies.

The USD was also boosted as a safe have port by comments from Moody’s that the triple-A rating is safe; risks to the rating would arise if the government is unable to bring a downward trajectory on debt and if the US dollar is challenged as the main reserve currency.

Data today from Europe confirmed that June PMI which measures activity in the manufacturing and services sector came in weaker than expected, however the euro is up this morning against the USD and the GBP as stress tests on Greek banks were positive. In the UK mortgage approvals came in better than expected, however net lending was down. Sterling is under pressure against the Euro and the USD following the dip in market confidence.

report by Phil McHugh

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