Foreign Exchange Report : Fear Returns to World Share Markets as ECB Makes Emergency Bank Loan and Global Data Disappoints

Published: Friday, 19 August 2011 06:42 BST - Written by John Cameron

STORY LINK Foreign Exchange Report : Fear Returns to World Share Markets as ECB Makes Emergency Bank Loan and Global Data Disappoints

The Pound Euro exchange rate (GBP EUR) is 1.1520. The Pound Dollar exchange rate (GBP USD) is 1.6469. The Pound Australian Dollar exchange rate (GBP AUD) is 1.5921.

The recent erratic behaviour in stock markets continued yesterday as global equities once again plunged. London’s FTSE 100 index suffered its ninth largest one day loss in history to close down by 4.49%, whilst other European markets suffered even greater downward moves. North American and Asian shares also haemorrhaged support during yesterday’s session.

Investors’ decision-making appears to be increasingly driven by fear, with the VIX index, (which measures the number of defensive ‘put’ options traders are taking out when buying equities), staying above 30% for the ninth consecutive trading day. At one point, VIX was trading up by 43% on the session and eventually closed up by 35%, its eighth biggest one day gain in history. The VIX is considered by analysts to be a gauge of panic in the markets.

Yesterday’s heavy losses for equities were not attributable to one specific event, but to an accumulation of different factors. Banking stocks were hit particularly hard on the day as market participants fretted over the effect that the proposed Eurozone tax on financial transactions gave cause for concern. These worries were exacerbated when the European Central Bank announced that it had made a short-term loan of $500m available to a single unnamed European retail bank, heightening fears that the Eurozone’s banking sector is showing signs of strain.

Data releases throughout the session, particularly those emanating from the US, added to the sense of doom, with figures pointing to an acceleration in the contraction in the American housing sector and the Philly Fed survey showing a massive dip in the mid-American manufacturing sector in August, following July’s positive figure. With US employment data showing an increase of 9,000 in claimants of unemployment benefit last week alone and UK Retail Sales figures showing a surprise dip in July, it was a poor day all round for economic indicators.

In the currency markets, the usual suspects have suffered as a result of yesterday’s sharp drop in global appetite for risk, with the Australian Dollar, New Zealand Dollar and South African Rand all incurring significant losses. Further downside is likely for the high-yielders during today’s session, with futures markets predicting that London’s FTSE 100 index will open 0.74% lower.


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