The ECB is under pressure to reduce the cost of borrowing today following a sharp reduction in industrial production in the Eurozone. The Euro is weaker this morning ahead of the decision and the Dollar has been supported overnight by underlying bearish market trends.

Pound Sterling - UK Markets

The Pound is 1% higher against the single currency amid expectations of an interest rate cut from the ECB. Sterling has gained slightly to 1.46 versus the US Dollar.

More profit losses from the High Street this morning as Argos and Curry’s announced a 10% decline in sales figures in the three months to January. UK markets barely registered the Government’s £20 billion finance package for small businesses yesterday although the Pound has continued to strengthen over the Euro ahead of the ECB meeting today. The prevailing market view at present is that the ECB lags behind the Bank of England in terms of monetary easing policy. Although Sterling is likely to continue to trade at low levels internationally as it falls into the trough of the downturn, decisive action from the MPC means we could see recovery in the UK begin earlier than in the Eurozone. There is no data due in the UK today.

US Dollar - US Markets

The Dollar is retaining its current strength, supported by the announcement of President Obama’s $775 billion rescue package and the international flight to quality while market confidence is low.

Retail sales fell 2.7% in December despite the busy Christmas period. This is a decline for the sixth consecutive month and comes amid news that recession is expected to drag on throughout 2009. Negative sales data led to a negative trend in equity markets yesterday. Although economic downturn in the US remains severe, the US is also expected to be the first economy to enter recovery and international risk aversion is supporting the Dollar at present. Oil has risen to $45 a barrel as OPEC has announced further production cuts in the face of reduced demand. Producer Price Indices and the Philly Fed Manufacturing Survey are due out in the US today.

Euro - European Markets

The Euro is back to 0.90 versus the Pound ahead of an interest rate decision from the ECB.

Eurozone industrial production fell by 7.7% in the year to November. This contraction was larger than expected, coming after the 5.7% revision for the year to October and reinforced the view that recession will be severe in the Eurozone. The Standard and Poor’s cut Greece’s credit rating yesterday and official figures show inflation for the 16 member region has fallen to a 26 month low, largely on the back of cheaper energy prices. These figures are adding to the case for an ECB interest rate cut and a 0.5% reduction is expected, taking the base rate to 2%. This will match the lowest rate since the ECB was founded and could be set to fall as low as 1% later in 2009. The decision will be announced at 12:45 GMT and will be followed by a speech from President Trichet.

Other Currencies - Highlights

The Australian and Kiwi Dollars continued to weaken yesterday against the Pound and US Dollar as risk aversion prevailed internationally. The Australian unemployment rate rose 0.1% to 4.5%.

A famous song once began “Looking back we could have done it differently” and I think that sums up how we all feel in 2009.

At the start of 2008 everyone was happy, investors were cheering at the continuing rise in house prices, availability of mortgages and so many options to invest their money it was unreal. Fast forward four months to April and the wheels began to fall off in a dramatic and rapid downturn that would leave everyone feeling the bitter cold of recession by the end of the year.

Investment companies began to close their doors and declare administration, mortgage companies decided not to lend to the 90% of people they would have done four months earlier and even the credit card companies started to be a bit more wary about who they would issue their plastic money machine to.

By the end of 2008 high street shops were closing, more and more companies were closing their doors for the final time and the threat of redundancy was hanging over many of the country. The banks had to be bailed out by the Government, with one major player only being saved with a few days to spare. The news that we all expected to hear was confirmed that the country was now in recession and how the media told us, every headline, news program and radio debate show was dominated by how the next two or three years would challenge us all.

It is fair to say that how quickly things changed in the space of 12 months came as quite a shock, but, the leading question is, why did things change so quickly?

The bubble had been ready to burst for many years. The banks were over lending, credit was easier to pick up than the flu and you could invest in property in every corner of the globe, it really was that simple. Property prices were rising at a rate that was just unsustainable and the introduction of the 125% mortgage was surely a sign that things were getting out hand, meaning that you owned an extra 25% of nothing!

As we all look around and wonder who is to blame, it is a very leading question. Do we blame the banks for over lending? Is it the mortgage companies who have allowed people to borrow beyond their means? Is it the investor who has caused the price rise of property by over buying? Are we as individuals to blame for overspending and over borrowing? Or should we firmly look at the Government and ask the question – How did this happen and why was it not spotted and brought under control?

2008 was a year in which we started with so much optimism and ended with more doom and gloom than even the most pessimistic person in the world could have predicted.

So, to finish in the words of another famous song, in 2009 “things can only get better”.

The Bank of England have announced another cut in interest rates to their lowest levels since 1951, it is great to see some top level action but how will this help and is it the best we can do?

Firstly, lowering interest rates should have a positive effect for homeowners, cutting their monthly repayments and putting “money back in their pockets”.  It is also possible that lower interest rates will mean more purchases of homes with the better deals that could be available.  This is assuming of course that the lenders pass these cuts on and improve lending conditions.

However, the burning question must be: are we tackling the cause of the problem or handling the effects?  Ultimately, the major problem as I see it is the level of personal debt, not just with mortgages but credit cards.  Consumers who are “maxed out” on credit cards and just about covering their monthly commitments will not be able to increase spending on the back of numerous interest rate cuts.  Banks will not feel more assured to lend to consumers, or businesses, if the current debt has not been reduced.

The government, to its credit, has started discussing mortgage holidays until economic conditions improve.  This is a start but a start only.  If the government really wishes to stimulate spending, then the only way will be to create in the first instance, credit card debt holidays, and ultimately a cancelling of a % of credit card debt to increase consumption.  Many will argue that borrowers got themselves into this state and therefore should get themselves out of it alone.  However, with banks being granted bailouts, why shouldn’t this program be expanded to include a consumer bailout?

It goes against the capitalist mindset, but the financial precedent has been set.  Only once personal debt has been reduced will banks feel more secure in lending, spending will then increase and the economy can return to a period of growth.  Whether credit card companies feel the same way is another matter…

Is now a good time to invest?

So we’re on the brink of recession, if not already in one.  Another dismal day on the markets, with shares dropping around 9% approx.  All sectors today in the British economy have fallen substantially.  However, doesn’t this scenario provide the opportunity investors are looking for?

It doesn’t take a rocket scientist to work out that buying shares at their lowest and selling at their highest is the utopia of investing in the markets.  In fact many advanced investors do not sell their shares as they drop but simply buy up more of the stock in anticipation of the upturn.

Warren Buffet yesterday told American investors to “buy American” as he is doing, supposedly because many US companies have fallen as far as they can….

…and this is the question; when will the markets hit the bottom?  I have friends who have started buying up banking shares in RBS and Barclays because they feel the bottom has been reached, or at least has nearly been reached, when taking a long-term perspective.  As always, investing is influenced by those human emotions of confidence and fear.

Logic too should play its part, and this is why some investors are getting proactive now.  It is however down to our political leaders to change the emotional momentum right now and we wait on their every word.