Currency markets ended last week on edge as concerns over lending standards and bad loans within US regional banks rippled through the financial world. Leveraged credits (typically companies with bonds deemed “junk” by the three major rating agencies) tumbled after the collapse of auto parts manufacturer First Brands Group. Banks and funds the world over own large slices of similar debt.
With all this talk of CLOs and lending, it all felt a little 2008. That feeling was particularly stark when the International Monetary Fund (IMF) head said bubbling risks in the private credit market kept her up at night.
Closer to home, last week served up more evidence of the treacherous path ahead for the UK. If tepid growth and rising unemployment weren’t bad enough, there are fears that headline inflation could pass another uncomfortable milestone this week. Should inflation breach the 4% mark, that could force the Bank of England into an even more hawkish position as we head towards the end of the year.
Markets did welcome the chancellor’s confirmation that she would be announcing tax rises and spending cuts in the autumn budget. Bond yields fell in a welcome piece of good news for the government (more on that subject below).
Across last week, sterling strengthened by the best part of a cent against the US dollar. The going was tougher against the euro, which managed to claw back some value to end Friday about where it had begun last week over the pound.
There are several major economic releases to keep an eye on this week. The UK and USA inflation reports will undoubtedly dictate the direction for their respective currencies, while the UK and the eurozone report sector PMI data on Friday.
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