A bold move by the BoE

End of my first week writing this blog and what a week it has been. We've seen Lewis Hamilton become the youngest ever F1 Champion, Barack Obama become the first black president of the United States and the BoE unexpectedly slashed interest rates by 150bps - the biggest cut since 1981! The ECB also cut rates by 50bps.

The reasoning behind the rate cut is simple - to stimulate lending and revive the credit markets. Bad news for savers but good news for mortgage holders...well not quite. If you have a tracker mortgage (which tracks the BoE base rate) then happy days. Otherwise, it is still not known whether the cut will be passed on by the banks...I know a couple of banks have said they will be passing on discounts on their variable rate deals but others have withdrawn some products altogether (an interesting stat I read recently - the number of mortgage products available in the market has fallen from 15,000 a year ago to just 5,000 now - a fact that will not be helped by the concentration of the retail banking market which will lead to less competition and higher prices). The UK Council of Mortgage Lenders has said that its members would not automatically pass a base rate reduction on to customers in the form of cheaper loans.

They blamed this on a “dislocation” between the base rate and the higher interbank borrowing rates. LIBOR, which is more relevant to banks when pricing credit, is still high despite falling below 6% this week. This means that banks are finding it harder and expensive to borrow money which impacts the consumer. Easily available credit is what caused this crisis in the first place. The banks are now risk averse - they are not willing to lend as readily - and if they do they want to levy a risk premium. So don't expect things to change dramatically anytime soon.

Was the decision a good one - well only time will tell. The markets were expecting a 50bps cut so the initial shock was a good one. I can think of a few reasons for the size of the cut; (i) to keep up with the US and Japan whose rates are extremely low; (ii) to force the banks to pass on at least some of the cut onto customers; and (iii) because they realised the sheer severity of the recession that is ahead of us and a realisation hit that they should have acted earlier (see Robert Preston's blog on the BBC website).

Other bits worthy of a mention - M&S reported 34% fall in profits; BA have reported a 91.6% fall in half year profits ; BT issued a profit warning which sent its shares below the 1984 floatation price; a Goldman Sachs fund posted $990m loss after 10 months trading; the IMF have predicted the British economy will shrink by 1.3% in 2009 and will be the worst performing of the developed economies; house prices down 2.2% in October according to the Halifax, brings total drop to 13.7% for the year.

And the FTSE....

Last week was the most successful week in the history of the FTSE100 Index. The FTSE enjoyed a consecutive 6 day winning streak which was probably a combination of excitement around the US presidential election (the markets rallied due to the belief that an Obama victory would lead to the quick implementation of policies and initiatives aimed at fixing the US economy) and in anticipation of rate cuts by the BoE and ECB. That finished on Wednesday when disappointing results from ArcelorMittal and Carlsberg A/S overshadowed the presidential election victory for Obama (the so called 'Obama bounce' never materialised). Add to this the terrible UK factory production and services figures which cemented the opinion that the country is heading for a recession. Yesterday property developers led the decline following news about a further fall in house prices.

This tells me that the current rally in the FTSE is no more than a temporary bull in a bear market. The trend is still down - a grim economic outlook for both the US and Europe will be the main factor driving the trend. Expect the markets to continue to be volatile.

Points worth noting (those in bold are major):

Support – 4200 ; 4165 ; 4335 ; 4830 (previous support may become resistance)
Resistance – 4440; 4545 ; 5065