George Osborne: optimistic package of tax rises

Chinese policy change boosts market

A change of policy last weekend by China on its yuan currency served as a short-lived boost to global markets early last week as stocks rallied from Tokyo to New York.

The end of the two-year currency peg against the US dollar, adopted during the global financial crisis, was seen as a positive move for global economic growth.

US law-makers have complained for several years that China undervalues its currency to make its exports cheaper thus driving up the cost of American exports and adding to the already sizeable US trade deficit.

Beijing, however, had ruled out any revaluation for the yuan despite this ongoing pressure from Washington.

The fall back in the markets reflected the belief that the token gesture was merely an attempt to stave off pressure at the G20 summit this weekend in Toronto.

The UK budget did little to change the southward direction of the UK's leading share index on Tuesday.

Finance minister George Osborne unveiled an optimistic package of tax rises and spending cuts that aim to cut the UK's deficit to almost nothing in five years.

The fiscal tightening revealed by Britain's coalition government was endorsed by ratings agencies in that it was seen as supportive of the countries 'Aaa' rating. The British government's borrowing costs were at a 13-month low at time of writing as a result of the ambitious plan.

The release of the Bank of England minutes surprised the market with the news that one of the members of the monetary policy committee wanted to raise rates by 0.25% on concerns about the current high inflation rate.

This caught the market by surprise and sent the pound to its highest levels since late January against a basket of currencies on fears that UK interest rates may have to rise this year.

European stocks added to their declines this week, led by the Greek, Spanish and Portuguese indices as credit default swaps on Greece rose 38 basis points to an all-time high of 970 basis points.

The ISEQ dipped below the 3,000 level to 2,977.24 at time of writing with the banks with CRH leading the decline as negative sentiment took hold.

In the US, risk appetite took another blow after US new home sales for May plunged 33% to their lowest levels in over 40 years.

This came hot on the heels of existing homes sales the day before the markets came under further selling pressure, fuelling the likelihood that this potential double-dip in housing could transmit itself into the wider economy.

If the market was hoping for reassurance from the FOMC they would soon be disappointed as the Federal Reserve signalled that growth was likely to disappoint over the course of the next 12 months, due in no small part to the problems in Europe.

Equities continued to move lower in spite of a fall in unemployment claims in the US, decreasing by 19,000 to 457,000 in the week ended 19 June.


EUR-USD: The single currency continues to find upside difficult. It is still susceptible to sharp pull backs, in spite of briefly breaking below the 1.2250-1.2260 level Wednesday afternoon.

A quick turn-around came after the FOMC announcement, back above 1.2300. However this sharp pull back is likely to be temporary, and may be a precursor to a test back towards the 1.2135-1.2145 level which remains a pivotal level in the near term.

The long term outlook remains for a weaker Euro and a test towards the 2005 lows, around 1.1650.

EUR-GBP: The strength of the pound continues to take its toll on the single currency but it was only able to make a marginal new low at 0.8202, still short of the all-important 0.817 which remains the primary objective. Resistance can be found around the 0.832-0.833 area and behind that at the key resistance above 0.84.


Copper has always been closely scrutinised as a bellwether of economic activity, never more so than with respect to China's consumption of it. Any concern or fear that Chinese copper consumption could start to fall back has had the effect of dragging risk off equity markets and pulling them lower.

It has been well noted that copper and equity markets have moved in lock step with each other. This has been especially true in the last 12 months and while the close correlation between these two markets is quite striking; it is not altogether surprising given how heavy in resource, and particularly mining stocks, the FTSE100 is.

London Metal Exchange (LME) copper has declined by 11% this year with the ever-present disquiet about Europe's sovereign debt crisis and fell sharply lower this week after US housing reports signalled further economic downside

At the time of writing, Futures for September delivery gained 3.55c, or 1.2% to $2.99 a pound on the Comex in New York. Copper for delivery in three months climbed 1.4% to $6,604 a metric ton on the LME.

The next few days are likely to be quite important and prices will be more than slightly choppy, but long-term momentum is starting to turn negative.

Brenda Kelly and Michael Hewson – CMC Markets