Tuesday, December 21, 2010

The Nightmare Before Christmas - Weekly Market Update

Whoever was dreaming of a white Christmas certainly would not have anticipated the nightmare that the UK has become over the weekend. Apart from icy roads and halted flights it has been the retailers who are panicking about how the snow fall will affect the sales over the last weekend before the festive period. Friday’s retail sales figure came out as expected for November but the real pick up in the figures was meant to come from the rush to spend more before the VAT rise comes in January, that and the general air of goodwill and generosity of course. Retailers said that yesterday sales seemed to be picking up and business recovery swiftly, but shoppers could be making up for lost time after the widespread closure on Saturday. These issues are naturally causing grief for the government, who rightly – or wrongly – are picking up the flack for a familiar frozen country. Quote of the season has to go to David Jones, Waitrose head of supply chain management, with ‘The most important thing is to get our turkeys out’.
I am not entirely sure that Nick Clegg would agree with him on that, as he increases pressure on Cameron by saying that the government would not stand by if Britain’s banks paid out large bonuses but did not increase lending. This comes at the same time as the news that one in ten bankers and traders in the UK and Europe could receive no bonus at all this year thanks to weaker revenues. Vince Cable has stuck his oar in the debate, by saying on Sunday that the sector could face additional taxes if it failed to exercise ‘real restraint’ this season. I will be impressed by anyone who manages to be restrained at this time of year!
Clegg and Cable are not the only ones to pipe up over the past few days, with George Osborne affirming that the rise in VAT will be a permanent one, which will be a blow to consumers. It is set to change from 17.5% to 20% on January the 4th, although the 50p tax rate for those earning more than £150,000 a year will be temporary. Meanwhile, Cameron is holding a meeting today with a collection of the general secretaries from some of the main unions in an attempt to keep the lines of communication open thanks to the possible deterioration of industrial relations.
It is a relatively quiet week with the Public Sector Net borrowing coming out tomorrow and BoE minutes on Wednesday, as well as GDP.
Have a wonderful Christmas and New Year! 

Jeremy’s Trade of the Week

This week’s trade of the week is a GBPEUR leverage Convertible Step with the client wanting to protect an annual budget close to the forward rate and also benefit from market upside. Client is a buyer for EUR and seller of GBP.
The client was able to achieve a worst case rate of 1.1800 on his option which allows the client to benefit all the way up to a rate of 1.23. This rate increases by 0.58 cent every month, eventually ending with a 1.2850.
Should the rate touch the barrier level during the window period (1 month before the expiry date) then that month’s structure reverts to a forward at 1.2000 (2 cents better than current forward) for double the notional of that specific month.
This strategy requires no premium, and is also relevant for buyers of euros and sellers of other currencies. As there is a potential further strengthening for sterling in the future, it provides a balanced upside for this potential, while guaranteeing a tight WCR.

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