Quiet start to trading week ahead of key central bank rate meetings

The trading week started with worse than expected data out of China which caused a wave of selling leading to big falls in the world wide stock markets and a sell-off in risky assets. This allowed the pound to retrace some of the recent losses against the high yielding currencies like the Australian dollar.



China’s official service sector purchasing managers index for the month of February fell from a figure of 56.2 in January to a reading of 54.5 points in February. Whilst a figure above 50 indicates expansion, the reversal nevertheless concerned the markets about the outlook from the second biggest economy in the world. The announcement from Beijing that it is introducing new and more aggressive than expected measures to cool local property prices also troubled the markets.

The pound however failed to capitalise on the early reversal in the markets as data from the Bank of England (BOE) showed that just £13.8 billion was drawn down from its Funding-for-Lending Scheme (FLS) in 2012. The data also showed that net lending to UK households and business by FLS participants fell by £2.4 billion during the three month period ending in December 2012, compared to a rise of £0.9 billion in the previous quarter.

The FLS scheme has 39 participating groups and was set up to boost lending by enabling banks and building societies which increase their lending to borrow more money at a lower cost by reducing funding costs. The reality so far is that of a continuation of the trend of broadly flat lending growth leading to criticism from consumer groups that the FLS has hit depositors rates as the Bank’s have less need to chase retail deposits whilst doing nothing to stimulate lending to the economy.



Overnight, data showed that China has become the world’s biggest net importer of oil and the Reserve Bank of Australia held interest rates unchanged at 3%, dashing predictions of a further cut in rates in Australia to aid the domestic Australian economy. This has reversed the markets back to risk appetite with overnight stock markets recovering yesterday’s losses.



This week, the end of the week is likely to prove much more volatile as Thursday sees policy announcements from both the Bank of England and the European Central Bank and Friday sees the publication of the latest key unemployment data from the US.