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\ BOARD Or aOVKRNORS jJQ:3 ^3 January 19, 1962 JCAPITAL MARKET DEVELOPMENTS ABROAD I. United Kingdom II. Nine Charts on Financial Markets Abroad I, United Kingdom: Money and Capital Markets in December Withdrawals of foreign funds and evidence of declining business activity disturbed British financial markets during December. An outflow of funds in early December associated with rumors of a revaluation of the Italian lira was followed by substantial repatriation of money-market assets by European banks late in the month for window-dressing purposes. However, market trends took a turn for the better in early January, in part because of the return of European banking funds to London institutions Withdrawal of foreign funds caused short-term deposit rates to rise significantly during December, Between November 2k and December 29, the rate on deposits with local authorities (at 7 days' notice) climbed from 6 to 7 per cent and the rate on Euro-dollar deposits from 3.5,0 to 3*88 per cent. The immediate need of local authorities for funds at the yearend brought their net deposit rate (with exchange risk covered) above the Euro-dollar rate for the first time since mid-November, as may be seen in the following comparison (in per cent per annum)% Local authority deposit Forward exchange cover Net return 1961 - Oct« 6 Nov, 17 2k Dec, 15 29 7.50 6,25 6,00 6.50 7.00 -3.U5 -2.19 -2,60 -2.93 -2.51 L05 3-76 3-UO 3.57 U.U6 1962 - Jan. 5 12 6.75 6.25 -2.88 -2 <,67 3.87 3.58 Eurodollar deposit 3.25 3.uu 3.50 3.75 3.88 3.50 3.56 The net return probably led to the conversion of some Eurodollar deposits into local authority deposits, Earlier in the fall, when the net return favored local authority deposits, £30 million in Aug. and Sept. were converted from dollars to sterling assets and some £20 million in October, according to Bank of England estimates. The Bank noted that "these operations probably played a significant part in the demand for sterling throughout these three months.11 NOT FOR PUBLICATION DECONTROLLED A F T E R S I X MONTHS NOT FOR PUBLICATION ** 2 * By January 12, substantial reflow into London had brought down the local-authority deposit rate by three-fourths per cent and wiped out the earlier yield differential. The reflow contributed to the rise in the pound from a low of 280.73 U.S. cents on December 22 to 281.If? cents on January 12„ During December, the four-month decline in the Treasury bill rate came to an end. The gilt-edged market remained uncertain throughout December at a level appreciably lower than in November but the market tone improved in early January. By mid-January yields were approaching midNovember levels; the government securities price index was at 76.05 on January 10 compared with a low of 7U.82 on December 6 and with 76.03 on November 17. With the capital outflow, Britain's reserves declined by about $50 million in December. Exports declined slightly in December and averaged 1-1/2 per cent lower in the fourth quarter than in the third. The price of gold climbed from $35*1350 per fine ounce on December 20 to a peak of $35.1625 per fine ounce on January 11. Economic indicators available in December recorded further contraction in domestic activity in Britain. Industrial output declined nearly 2 per cent in October, about 5 per cent below the July peak. The steady fall in the value of retail sales from the July-August peak continued in November." Press reports stated that Christmas buying started late and that trade was concentrated in the last two weeks before Christmas, Credit availabilities continued to contract during December. Between August and December, advances of the London clearing banks have been reduced by £3Ul million to £3,209 million. Outstanding hire-purchase credit continued to contract in November. Since August, hire-purchase credit has declined from £971 million to £931 million. Money market, The yield on the 91-day Treasury bill went from 5.31 per cent on November 2k to 5.25 per cent in mid-December and to 5»3U per cent on January 5 (see Table and Chart 1). ' Throughout the period under review, the spread of the London over the New York Treasury bill narrowed. With the fluctuations in the discount on the forward pound, the net incentive (with forward exchange cover) moved fractionally in favor of the U.S. bill (see Table and Chart 1). Repatriation of European banking funds in early December and at the year-end pushed up rates on local authority and on Euro-dollar deposit's (see Table). The large incentive to shift from Euro-dollars to localauthority deposits (with exchange risk covered) which developed at the year-end apparently produced a substantial reflow of European funds into local-authority deposits in early January. By January 12, this incentive had been wiped out. NOT FOR PUBLICATION - 3 = NOT FOR PUBLICATION -* Gilt-edged market. Prices in the gilt-edged market moved erraticly during December but an upward tendency became apparent in early January' (see Table and Chart 6). Market talk of a further cut in Bank . rate in the near future accompanied the downward drift in security yields in January. The successful refunding of the It—1/2 per cent Conversion bond in December had a favorable effect oh the gilt-edged market. Moreover9 it was thought that official tap supplies of the 5=1/2 per cent Treasury bond 2008-12 was almost exhausted; the fact that the authorities are not taking steps to renew supplies of a long-dated bond was taken by the market to mean that long-dated bond prices will soon be free to rise with official consent. During the week of January 12, three issues of bonds totaling £15 million were issued by local authorities. They consist of £5 million of 6-1/2 per cent redeemable stock 1971-72 by the Buckinghamshire County Council, and similar issues by the City and County of Britol and the County Council of the West Riding of Yorkshire. These are the first issues made in more than two months. The new issues reflect, among other things3 an official desire to reduce the dependence of local authorities on short-term borrowing in favor of bonds maturing in the neighborhood of ten years. New capital issues. New capital issues in Britain (excluding those of the British Government and of nationalized industries) were at a reduced level in November but totals for 1961 as a whole already exceed those for I960. A new series just released by the Bank of England for 1961 show (in millions of pounds) the following%. Oct. Nqv^_ 52.1 1.8 33.7 I II III 136.0 - 0.2 233.6 12.U 135 08 131.6 - 1.9 129.7 2L6.0 50.3 Divided betweens Ordinary shares Preference shares Loan capital Total 96.9 0.7 38.2 135.8 95.L 0,8 33,5 129.7 163.3 •= 2 0 3 85.0 2U6.0 U6.0 0.2 50.3 3l,3 Gross issues Gross redemptions 155.0 19.2 155,0 25.3 25L.L 8.L 62.0 11.7 35.2 0.9 U.K. borrowers Overseas borrowers Total borrowings - 0.6 20.0 0.1 liio2 National savings. A net withdrawal of £36 million from National Savings occurred in December, about the same as in December I960. Between April 2 and December 30, however, the National Savings movement had a net withdrawal of £70 million in 1961 compared with net receipts of £70 million in I960. More attractive yields on competing small-savings media account for 1961 losses. NOT FOR PUBLICATION NOT FOR PUBLICATION - h - Exchequer receipts and payments. U,K= Treasury fiscal returns through the end of December raise some question whether the Chancellor's estimate for a substantial reduction in the over-all deficit for the 1961-62 fiscal year (ending on March 31) may in fact be realized. Through December, the over-all deficit was down £100 million but receipts in the first quarter of 1962 may be affected by the recent declines in business activity, British fiscal data through the end of December in millions pounds arez Fiscal year 1961^2 budget 1960-61 April 1 to Dec. 31 estimate actual ~l95l~ 1950" Above-the-line Revenue Expenditure Balance 3-9U? ~ 3.518 6,508 6;002 5,931 $,787 - 557 - 657 506 1U7 U90 575 5itl -l?lU7 69 39L Below-the-line net expenditure Over-all deficit M9 -130U6 of London clearing banks and other banks» Private advances by the London clearing banks declined in December by £17 million to £3,lUl million, the smallest in the past five months„ T V liquidity ratio rose to 35.3s the highest level since January 1958. Net- deposits rose from £6,308 million in November to £65340 million in December, Holdings of Treasury bills rose by £36 million5 thereby reversing November-s decline, Cash and call loans also rose significantly» Revelant- figures for the clearing banks are as follows (in millions of pounds)? Holdings Net Private of Treas. Call liquidity deposits advances bills loans ratio__ Level in Dec0 1958 Annual Dec. Dec. Dec. changess 58-DeCo 59 59-Dec. 60 60-Dec. 61 Change from preceding months September October November December 6,131 2,0l*6 + 156 - 125 _+ 78 + 667 «• UU6 - 18 - 16 + 38 - .46 ^ 32 ~ 128 - 30 . 28 - 17 1,185 + 33 - 212 . + 75 NOT FOR PUBLICATION + 105 + 27 + 61 38 587 3U.6 27 o„U 2.3 3.U 63 + 6 + 5U + U7 4- 20 + + + l.u 0.7 0.3 0.6 NOT FOR PUBLICATION - 5- Loans by members of the British Bankers Association declined by £227 million between August and November compared with a £3U? million increase from November I960 to August 1961. The recent declines have fallen heavily upon financial and personal borrowers but most business borrowers also show cuts, as the following summary figures show (in millions of pounds)i Nov. 1960Aug. 1961. Aug. 1961 Nov. 1961 Manufacturing Textiles Retail trade Miscellaneous industry and trade Agriculture Food, drink and tobacco Building Financial Personal and professional Other Total 105.0 28.it k.h 36.5 2U.3 . 2U.it 27.9 61.9 . 22.3 12.5 - U0.2 - 23.0 316.9 -226.9 — - 6.3 10.1 12.3 21.2 ' 21.2 10.2 12.3 - 63.I Installment credit. Total outstanding hire-purchase credit declined a further £11 million in November to £931 million. Recent figures on installment credit are as follows: Shops July Aug. Sept. Oct. Nov. 306 305 303 303 303 Finance houses 662 666 650 639 628 Total 968 971 953 9U2 931 Change + + - 23 3 18 11 11 Hire-purchase contracts for lit,U77 new vehicles were made in December, compared to 20,101 for November and 15,209 for December I960. Contracts on used cars were only U6,77k as opposed to 63,113 in November and 38,305 in the preceding December. Foreign trade. Seasonally-adjusted exports dropped from £305 million in November to £297 million in December. With imports reduced from £360 million to £350 million, the trade deficit went from £Ul million in November to £39 million in December. However, exports declined by 1-1/2 per cent and imports were higher by the same figure in the fourth quarter as a whole compared with the third quarter. Recent monthly averages of quarterly data (in millions of pounds) are: NOT FOR PUBLICATION NOT FOR PUBLICATION I960 1961 - I II III I V : - 6 - Reexports Imports Trade balance 296 12 380 - 72 309 307 # 9 12 13 15 1U 385 362 358 363 30U - 61± - U2 - 3U - U5 Agreement was reached on January 3 to set up a pool of insurancecompany money to be used for the long-term finance of British exports, Whether the agency to be set up will merely act as go-between for the insurance companies or actually handle funds is still uncertain,. The clearing banks and the Bank of England are still discussing bank export financing at a fixed interest, perhaps in the neighborhood of 5-1/2 per cent, ' Foreign exchange reserves„ The gold and convertible currency reserves of the United Kingdom dropped by $238 million to $3,318 million. However, repayment of debts to the United States and to Canada amounted to $188 million5 leaving a net loss of $50 million= This decline is largely attributed to speculation on revaluation of the lira and to endof-the year window-dressing„ Foreign exchange market, During December and early January, sterling fluctuated fairly widely with a somewhat downward tendency (see Table), After an initial drop culminating on December 1, sterling rallied, fell again to a low on December 13, rallied once more, and fell to the lowest level since July on December 20 at 280,61 U,So cents. In the first week of January9 the pound recovered and was at 281,15 on January 12. London gold marketo The price of gold moved up in early January to a peak level of $3^%T625"per ounce on January 11 from $35.1375 on December 27, Selected recent gold quotations in London are as follows: Nov. 28 29 30 $35.lW/8 35.15-1/2 36.16 Dec. 1 6^ 12 13 19 20 27 $35.15-7/8 35.15-3A 35 -15-1A 35.111-1/2 35.1k 35.13-1/2 35.13-3A Jan. 3 7 8 9 10 11 $35.15-1/2 35.15-1/2 35.15-3/8 35.15-7/8 35.16 35.16-lA Stock market. After uneven movements in November, stock prices rose generally in December and early January (see Table and Chart 1). "The Financial Times stock index; climbed from a low of 291,8 on December 7 k to 305,3 on January 10„ However, the figure of January 10 was still slightly below the mid-November level. NOT FOR PUBLICATION NOT FOR PUBLICATION - 7 - During December, British and Dutch Unilever were placed on the board at the New York Stock Exchange„ Trading in these stocks was extremely active and the rise in prices contributed to the upward movement in London stock prices * On December 18s Imperial Chemical control CourtauldSe The merger would be the However, the board of Courtaulds has decided holders that they agree to the offer made by made public an offer to buy largest in British history. not to recommend to its stockImperial Chemical» British Commonwealth, Europe and Soviet Area* IIo Nine Charts on Financial Markets Abroad Chart 1 Chart 2 Chart 3 Chart h Chart 5 Chart 6 Chart 7 Chart 8 - Interest Arbitrage, United States/Canada - Interest Arbitrage, New York/London - Interest Arbitrage for German Commercial Banks - Interest Arbitrage, Frankfurt/London - Short-term Interest Rates - Long-term Bond Yields ° Industrial Stock Indices = Spot Exchange Rate's — Major Currencies Against UoSo Dollar Chart 9 - 3-month Forward Exchange Rates united. Kingdoms Treasury Bill Yields aud Exchange Rates 3-moo Treasury bill ^arbitrage calculation ~ Diffe: In favor U.K. U.S. b/ a/ UoK o bill£/ I960 - High 5.68 k.95 Low '2ol3 2o08 1961 - High 6.7k 2.7U Low Uol7 -2.16 3.63 =0 o81i bok< 1.88 Oct. 20 5.88 2.30 3.58 27 5.63 2.29 3.3k Nov. 3 2.28 3.03 5.31 10 2.8k 5.31 2.k7 2.78 17 5.31 2.53 2.76 2k 5.31 2.55 Dec. 1 5.28 5.53 2.75 8 2.68 5o25 2.57 2.62 15 5,25 2.63 22 2.68 5.28 2.60 2.61 29 5.28 2.67 2.60 Jan. 5 5.3k 2.7k 12 2.76 2.58 5.3k a/ Market quotation for Fridayo 5/ Spread between spot and 3=month equals (-)„ c/ Net of difference in bill yield London deposit rates UoSo Local dollar^ authority (3-mo.) (7 days not) Spot pound (U.S. cents) 0.6L =2.33 -0.79 =k o 36 1.95 - .23 1.13 -2.12 281.58 279.83 281.62 278.17 =3o00 -2.78 -2.73 -2.73 -2.k9 -2.60 -2.92 -2.77 -2.93 -2.62 -2.5k =>2 088 =2.67 0.58 0.56 0.30 0.11 0.29 0.16 -0.1? -0.09 -0.31 +0.06 +0.07 -0.28 -0.09 281.62 281.56 281.U1 281.51 281.53 281.56 280.90 281.12 281.06 280.73 280.80 280.97 281.15 =»==• k.oo 3.13 7-1/2 6=3/1; 3.31 3.38 3.31 3.31 6-3/K 6-1/8 6-l/k 6-l/k 3.kk 3.50 3.63 • 6°l/k 6-l/k 6-1/2 6-1/2 7 6-3/k 6-l/k 3.81 3.75 3.88 3.88 3.50 __J^6 forward rate in per cent per annum. Discount less discount on 3-month sterling United Kingdoms Selected Capital Market Yields Government bond yields 7W~ War Loan Conso! 196k... 1965=75 UoK o I960 - High Low 1961 - High Low 6.20 Uo68 6.65 . 5.15 6 oil k.93 6.68 5.95 Oct. 19 5-9U 5-53 6.92 5.95 5.70 5.02 6.78 5.70 Share yl |>d It.96 3.7U 5.U8 i t .22 Jt Yield Share p r l.k9 0.63 1.90 0o86 ir 29k .6 228.6 365.3 287.7 6.32 6.65 5.93 288.0 6.3k 5.U2 0.92 6.10 T5.83 6.59 0.86 6.3k 5.U8 287.7 Nov. 2 6.10 6.62 6.35 5.73 1.00 5 . 3 5 29U.7 16 6.70 6.1$ 5.83 6ok3 5.llt 1.29 306.8 6.82 6.29 23 5.98 6.55 5.38 1.17 293.lt 30 6.23 5.90 6.77 6.k9 1.20 5.29 298.0 Dec 0 7 6.81, 6.29 6.58 5.97 5.U1 1.17 291.8 6.2k 6.73 lk --5.95 6.55 5.30 1.25 297.9 . 21 6.27 6060 6.78 1.28 5.93 5.22 302.1 28 6.78 6.27 5=19 5.87 6.59 l.ko 30lt.8 Jan. k 6.77 6.27 5.85 6.57 5.15 l.k2 307.1 6.20 12 5.8o 6.6ii 6.50 5.17 1.33 -.305.3 ji/ Financial Timeso b/ Difference between yield on 2-1/2 per cent Consols and share yield 26 INTEREST A R B I T R A G E , U N I T E D S T A T E S / C A N A D A Thursday figures T H R E E - M O N T H T R E A S U R Y BILL RATES I V A RATE D I F F E R E N T I A ^ A N D F O R W A R D C A N A D I A N D O L L A R SPREAD IN F A V 0 6 OF C A N A D A + A/ V'S RATE D I F F E R E N T I A L W I T H F O R W A R D E X C H A N G E C O V E R NET I N C E N T I V E I N F A V O R OF C A N A D A + INTEREST A R B I T R A G E , N E W Y O R K / L O N D O N Friday figures r i 3 - M O N T H TREASURY BILL RATES / V \ y DOLLAR R A T l - l O N D O N ^ « i I — f - * E W J . . i-J r. , - I I YOB«- I ' l l I I i I i j 1: i : 1 i i I [ i 1 0 I i i ! ! 1 ,T RATE D I F F E R E N T I A L A N D " 3 - M O N T H F O R W A R D STERLING 1 1 I I I " SPREAD I N F A V O C O f i i LONDON F O R W A R D RATE Discount — RATE D I F F E R E N T I A L W I T H FORWARD EXCHANGE COVER OF L O N D O N /A/\A/y^T | I N F A V O R OF N E W T O R I r I 11 I N T E R E S T A R B I T R A G E FOR G E R M A N C O M M E R C I A L B A N K S Friday figures 3-MONTH Pi TREASURY BILLS, I N T E R B A N K _ EURO-DOLLAR DEPOSIT LENDING RATE A N D RATES RATE D I F F E R E N T I A L A N D F O R W A R D DEUTSCHE MARK SPREAD IN FAVOR OF FRANKFURT: \ / \ V \ | FORWARD RATI I P'SCOUMT ( — ) RATE D I F F E R E N T I A L W I T H FORWARD NIT INCENTIVE:. EXCHANGE COVER IN FAVOR OF FRANKFURT ( + ) Vm • \ INTERBANK LOAN RATE $ J I960 1961 Note: Special forward role available lo German commercial banks. 1**2 I N T E R E S T A R 8 1T R A G E, F R A N K F U R T / L O N D O N " 3 - M O N T H TREASURY DELLS A N D I N T E R B A N K L E N D I N G RATES , ± - — i n — | — \ A GERMAN INTERBANK A RATE D I F F E R E N T I A L A N D J - 3 - M O N T H F O R W A R D STERLING — S P R E A D I N F A V O R OF U N I T E D K I N G D O M BILLS O V E R : RATE D I F F E R E N T I A L W I T H F O R W A R D E X C H A N G E C O V E R NET I N C E N T I V E OF U N I T E D K I N G D O M O V E R : I960" 1961 19 62 S H O R T - T E R M INTEREST RATES * EISO-DOUAR / i - L O N D O N "j" CANADA 1- 1958 * 3-month Ireoiury bill rales tor all countries except Japan (3-month interbank deposit rale) and Switzerland (3 month deposit role) , "j" 3-monlh rale for U. S dollar deposits in London \v\ . L O N G - T E R M B O N D YIELDS 1958 1959 1960 1961 1962 _Chorl_7 INDUSTRIAL STOCK INDICES* 1958=100 I I I I M I I I 1-1 M I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I J J pT\ ' ' 4 1 1 Noli: 11 1 II I I I A " U.S. 1 1 1 1 1 1 II. I I 1 Japan-. Index ol all slocki traded on Tokyo exchange. 1 1 1 1 1 1 11 1 11 1 111111111 ^ SO SPOT EXCHANGE RATES - M A J O R CURRENCIES A G A I N S T U . S . D O L L A R . ... •• -1962 p, r ttnl Above par v\ 3 - M O N T H F O R W A R D E X C H A N G E RATES A G A I N S T U. S. D O L L A R S S W I S S FRANC A G A I N S T P O U N D STERLING - L O N D O N PREMIUM* - & A G E R M A N MARK A A G A I N S T P O U N D STERLING - L O N D O N FRENCH F R A N C / . II V\
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