Pound falls off the cliff. Markets for the week ending 14-Aug-08

Story of the week: Pound falls off the cliff
- BOE delivered gloomy assessment of the economy paving possibility of rate cuts?
- UK Unemployment rose 60k in Q2 from 13k in Q1
- Jul UK CPI jumped 0.6% to 4.4% and may remain elevated and rising to 5% in coming months - resulting in soaring prices destabilsing the UK economy
- Prospect of 'near term' rate cut unlikely
- UK home sales dropped to 30 year lows
- Dollar may have reached bottom levels and is at the start of long-term uptrend


European GDP contractions
German economy, Europe's largest, contracted 0.5 percent from the first quarter
French economy contracted 0.3 percent from the first quarter
- slump in construction
- stronger euro and slower global growth have damped demand for exports
- exports declined and companies cut spending
- faster inflation erodes domestic spending power.


Bank de-risking. Or are they ?
Qn: Does a bank's practice of lending a large proportion of the finance for the purchase of their assets at a discount factor a cause for concern ?
A) RBS - disposal of $8bn of loans outstanding to private equity
B) Merrill Lynch provided 75% financing of it's $30bn CDO sale to lone star

In the above situations, the banks argue that the finance has been cleverly structured to make it extremely unlikely that the exposure would materialise
But the toxic assets remains a residual exposure if they fell below the equity buffer invested by the private equity firms

Eric Tan, London