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BOARD OF eOVERNOKS
LIBRARY
H. 13
No. 113
JUL 221963
July 17, 1963
U^r.A], P.ESZRVE^ANK
o, nicHMcAcxr
gCAPl rAL MARKET DEVELOPMENTS ABROAD
I.
IX.
I.
United Kingdom
Nine Charts on Financial Markets Abroad
United Kingdom:
Money and Capital Markets in June
Financial markets were somewhat easier in the United Kingdom in
the early part of June, but the market for short-term funds tightened towards
the end of the month. As a result, the Treasury, bill rate moved up late in
June but medium and long-term bond yields continued on the downward trend
which began in mid-March.
(See Table 1.) The Profumo political controversy
had a significant but momentary impact on stock prices and on bond yields;
bond prices had recovered their lost ground late in June and stock prices by
early July. On the foreign exchange market, the pound continued strong.
Table 1.
United Kingdom: Selected Securities Prices and Yields,
June-July
June
6
Security Price Indices a/
Industrial stocks
Bonds
Yields (per cent per annum)
Industrial stocks
Government securities
Treasury bill (3-month)
4-1/2% Conversion 1964
37o Savings bonds 1965-75
5-1/2% Treasury bonds
2008-12
2-1/2%,Consols
a/
b/
311.0
93.6
10
302.6
93.1
17
307.1
93.5
27
307.3
94.0
4
311.,6
94. 1
5.02
5.16
5.05
5.08
5. 01
3.56
3.67
5.03
3.59
3.63
5.08
3.59
3.60
5.05
3.63
3.56
5.01
b/3. 72
3. 65
5. 00
5.52
5.41
5.58
5.48
5.55
5.45
5.50
5.39
5. 50
5. 39
Financial Times,
July 5. Tender rate was 3. 76 per cent.
Bank loans advanced no more than seasonally in the month ending
June 19 and the clearing banks materially eased their liquidity position with
purchases of Treasury bills. The failure of bank advances to rise further
is attributed by the financial press to the apparent sluggish pace of business
expansion. This interpretation may in part be related to the disappointing
business indicators released during the period under review, which revealed
that industrial output was unchanged in April. However, installment credit
OFFICIAL USE ONLY
(Decontrolled After Six Months)
OFFICIAL USE ONLY
-
2
-
expanded appreciably in May. This credit contributed to the sharp increase
in retail sales of consumer goods and to the continued high sales of automobiles
reported in May. The May expansion in consumer spending suggests that business
activity is again slowly moving ahead.
There is a good deal of press speculation at the moment that
British financial institutions are about to introduce negotiable certificates
of deposits in the London market.
(See, in particular, The Economist,
July 6, 1963, p. 63.) Money market operators in Londorr apparently expect
that outstanding certificates might (as an outside limit) total as much as
£800 million or roughly about 10 per cent of outstanding deposits of the London
clearing banks. These estimates seem to be based on the assumption that
sterling-currency certificates will be issued and imply that the London clearing
banks will be primary factors in the market. If dollar-currency certificates
were to be issued, the smaller financial institutions now active in the Eurodollar market would presumably be chiefly involved. During June and early
July, rates on Euro-dollar deposits in London rose as both U.K. and U.S. Treasury
bill rates moved up.
The strength of sterling continued to be manifested primarily in
June (as in April and May) by a further narrowing of the forward discount.
Between May 31 and July 5, the 3-month discount fell from 0.64 per cent per
annum to 0.49 per cent per annum. This decline, along with a small increase
in the U.K. Treasury bill rate during the latter part of June, brought about
a covered interest differential in favor of U.K. over U.S. bills for the first
time since early January.
(See Table 8 and Chart 2.) In June, Britain repaid
the $250 million acquired in February and March from Continental central banks.
Reserves would have increased by $34 million in the absence of these repayments.
The fixing price for gold bullion was slightly up during the month.
The financial press has reported that two investment trusts (British
Assets Trust and Scottish United Investors) have completed arrangements for
borrowing dollars in the United States to invest in dollar securities. They
are both borrowing from the New York Life Insurance Company at 5 per cent,
estimated to be about 1/2 to 3/4 per cent cheaper than they would be able to
borrow in London. One loan is for $10 million for 18 years and the second
for $5 million repayable in two equal installments in 1977 and 1979.
(See
The Economist, July 13, 1963, p. 175.)
Money market. Money market conditions were easy in mid-June. Funds
were shifted out of the unsettled securities markets and funds were also available
with the pay-off for two maturing government bond issues. The Treasury bill
offering on June 14 was subscribed twice over. The after-tender market rate
on that day was 3.56 per cent as contrasted with 3.61 per cent on May 31.
(See
Table 8 and Chart 2.)
At the end of the month, however, a shortage of funds
developed, apparently because the banks attempted to increase their cash position.
Tne Ba..k of England made some purchases of Treasury bills, but on June 29
almost all the discount houses had to borrow substantial sums from the Bank
at Bank rate. Thereupon, on July 5 and again on July 12, the Treasury bill
tender rate rose to 3.76 per cent; this was the highest level since March 21
when the Bank of England forced the discount houses to borrow at 1/2 per
cent above Bank rate. The higher British tender rate in July came at a time
when the U.S. Treasury bill rate was also rising.
OFFICIAL USE ONLY
OFFICIAL USE ONLY
The covered interest differential in favor of U.K. over U„ S, Treasury
bills widened slightly in late June, (See Table 8 and Chart 2) despite the
rise in the U.S. bill rate but the differential remained small, nonetheless.
In the local authorities funds market 3 Treasurer's borrowing
requirements continued to be low in June as tax receipts continued to flow in.
The tax receipts and the ample supply of funds to the money-market mid-month
caused rates to move down. The 3-month rate fell to 4.25 per cent on June 21
from 4.44 per cent on June 7. At the end of June, the market for temporary
funds became firmer as the availability of domestic funds fell and also because
some foreign money was withdrawn. The supply of mortgage funds, which were
forthcoming in May only at rates above the Public Works Loan Board's 5-3/4
per cent rate, were more easily available in June as gilt-edged yields declined.
Tight money market conditions on the Continent, particularly in
Germany, Switzerland, and the Netherlands, helped maintain the high level of
Euro-dollar rates in June which had prevailed in May. However, the Euro-dollar
deposit rate in London eased in mid-June ? reflecting the tone of the U.K.
short-term money market at that time, but moved up again in early July.
(See
Table 2 and Chart 3.)
Table 2„
United Kingdom: Rates on U.S. Dollar Deposits
By Maturity, Selected Dates, 1963
(in per cent per annum)
April
26 ,
Euro-dollar deposits:
Call
7-days
30 days
90 days
180 days
U.K. Treasury bill
U. S. Treasury bill
3.50
3.63
3.69
3.81
3.88
3.66
2.87
May
31
3.63
3.63
3.88
3.94
4.00
3.61
2.97
June
7
3. 63
3.69
3.88
4.00
4.06
3.59
2.97
July
14
21
28
5
12
3.50
3:56
3.81
3.94
4. 00
3.56
2.97
3.43
3.50
3.69
3.81
3.94
3.63
2.96
3.50
3.50
3. 75
3. 88
4.00
3.63
2.97
3.50
3.50
3.81
3. 94
4.06
3. 72
3.01
3.50
3.56
3.88
4.06
4.13
3.72
3.19
Bond market. The rise in bond prices which began in mid-March
continued through June except for a temporary relapse between June 10 through,
June 17 when the political implications of the Profumo affair upset the market.
By mid-June the market for bonds had recovered sufficiently to enable a £25
million London County Council issue to be floated successfully. Viewing the
month as a whole, yields fell moderately throughout the medium and long-dated
range of issues. (See Table 9.) Early in July, the War Loan reached a new
peak price for the year, and there was also a strong demand for the 5 per cent
Exchequer Stock of 1976/78.
Stock market. In contrast to the generally upward movement of bond
prices in recent months, the stock prices have changed little since the latter
part of April. Some commentators in the British financial press suggest that
the mid-February to mid-April rise in stock prices had already discounted the
higher rate of corporate profits expected from the general business expansion
now being awaited.
OFFICIAL USE ONLY
- 4 -
OFFICIAL USE ONLY
With relatively subdued buying activity in the market early in
June, the stock market was particularly vulnerable to the.political uncertainty
created by the Profumo scandal. On June 10^ The Financial Times' industrial
stock index fell seven points, which was the largest single-day decline since
the Cuban crisis. Bargain-hunting on the following day brought the index up
by 4,6 points, but the market remained very unsettled until June 17.
(See
Table 1 and Chart 7,) Stock prices did not make good the June 10 losses until
July 3's whereas bond prices had recovered fully by June 17= The Financial Times
attributes the sluggish nature of the stock market in part to the impending
reduction of the stamp duty on stock transfers from 2 to 1 per cent.
London clearing banks. Bank advances to the private sector levelled
off in June.
(See Table 3.) The increase of £17 million represented in part
the semi-annual debiting of interest charges. Bank liquidity, which had been
at a critically low level since February, eased in the month ending June 19 when
the banks added £99 million to their Treasury bills and call loans. The liquidity
ratio rose to 31. '6 on June 19 as contrasted with just over 30 per cent for the
previous four months.
Table 3.
United Kingdom: London Clearing Banks, Net Deposits and Selected Assets
(in millions of pounds)
n g e s
1962- 63""/
Mar.
1963
Apr.
May
June
Outstanding
June 19,1963
4-258
11
-94
+149
+104
6,668
xsl
1961-62-
+ 30
+137
-151
- 35
-20
-33
+
4-
2
3
-
83
2
2,677
1,089
b/+!20
-118
-105
+28
4
+ 99
1,538
3
+ 13
- 11
-15
+
3
-
14
50
+146
+117
+ 29
+31
+28
+ 3
+ 41
+ 42
- 1
+ 22
+ 17
+ 5
4,280
3,850
430
30. 7 31 .6
31. 6
NET DEPOSITS
SELECTED ASSETS
Claims, on Public Sector
Government securities
Treasury bills and
call loans
Loans to nationalized
industries
+ 33
• 1
1.
+
2.
Claims en Private Sector
Advances (net)
Other
+117
b/58
59
+491
+453
+ 38
3.
Special Deposits at Bank
of England
+ 77
-220
c/33.6
c/33.0
LIQUIDITY RATIO
--
--
30.5
30.5
a/ Fiscal years ending mid-March. Bank balance sheets are normally prepared for
the third Wednesday of each montn.
b/ Adjusted for the reclassification of £40 million from advances to money on call
in October 1961=
c/ Monthly averages.
OFFICIAL USE ONLY
- 5. -
OFFICIAL USE ONLY
Installment credit. The unique feature of installment credit in
May was the sharp rise in new credit extended by household goods shops, reflecting
expanding retail sales of durable goods.
(See Table 4.) At the same time,
new credit extended by finance houses in May rose substantially for the third
consecutive month. This was mainly due to the continued expansion of automobile
sales. Installment credit outstanding in May rose by £14 million.
Table 4.
United Kingdom: Installment Credit
1 9 6 3
Feb.
Mar.
.Apr.
May
111
140
97
132
93
116
99
164
101
177
114
201
+ 9
_49
-40
- 8
- 5
-13
- 3
- 3
- 6
- 2
+ 4
+ 2
- 3
+10
+ 7
+ 3
+11
+14
1962
New Credit Extended, Index
of value (1957=100)
Household goods shops
Finance houses
Credit Outstanding (£ mns. )
Household goods shops
Finance houses
Total
s
__
Jan.Mar,
Outstanding
May 31, 1963
--
311
584
895
Foreign trade. The average trade deficit for April and May was about
equal to that of the second half of 1962. While exports in this period averaged
3 per cent above the third quarter of 1962 (the higher quarter for 1962), imports rose only 2 per cent above that level.
(See Table 5.)
Table 5. United Kingdom: Foreign Trade
(In millions of pounds, seasonally-adjusted monthly averages)
Imports c.i.f.
Exports f.o.b.
Re-exports f.o.b.
Balance
Mar.
-365
306
12
1 9 6
Apr. June
-373
319
14
2
July- Oct. ~
Sept. Dec.
-374
-385
320 " 318
12
14
•
Jan, Mar.
-375
326
12
19 6 3
Apr. May
Apr.
Max
-391 - -389 -394
320
341
330
13
13
13
- 47
~ 40
- 53
- 37
- 48
- 42
- 56
- 40
Foreign exchange. Sterling was firm in June, with the spot rate
gradually rising from 280.01 cents per pound on May 31 to 280.12 cents on July 5.
The 3-month forward discount continued to fall in June, going from 0.64 per
cent per annum on May 31 to 0.49 per cent per annum on July 5„
(See Table 8
and Charts 8 and 9.)
Reserve movements. In June, after adjustment for repayment of $250
million of loans received in February and March from Continental central banks,
gold and foreign exchange reserves rose by $34 million. After the repayment,
however, the level of published reserves at the end of June at $2,713 million
was the lowest since 1957. Britain's drawing rights at the IMF were unchanged
in May, remaining at $2,445 million.
(See Table 6.)
OFFICIAL USE ONLY
f
OFFICIAL USE ONLY
Table 6.
United Kingdom; Reserve Position, 1963
(In millions of U.S. dollars)
^
A. Gold and convertible
currency
Less Central bank loans
Adjusted reserves
Jan.Mar.
Total
C h a n g e s
Apr.June
Mar. Apr.
+ 8
250
-242
-101
-250
149
+17
200
-183
+34
--
n.a.
--
8
-242
n. a.
B. Drawing rights on IMF
a/
- 6 -
-183
+34
+22
Outstanding
June 30, 1963
May
June
+81
-+81
-216
-250
+ 34
2,713
-2,713
—
n.a.
a/2,445
+81
n.a.
5,158
As of May 31, 1963.
Bullion market. The Lbndon gold market was relatively quiet in June
and early July, although the fixing price edged up from the low level reached
at the end of May.
(See Table 7.) Demand on June 19 and on July 10 was
reported to have been Tieavier than on other days in the period under review.
Table 7.
April 19
26
3
May
10
United Kingdom; Fixing Price for Gold Bullion
(In U.S. dollars per fine ounce)
35.091
35.082
35.076
35.076
May 17
24
31
June 7
35.083
35,079
35.073
35.078
June 14
21
28
July 5
35.084
35.082
35.083
35.089
Europe and British Commonwealth Section.
II.
Chart
Chart
Chart
Chart
Chart
Chart
Chart
Chart
Nine Charts on Financial Markets Abroad
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 Rates -- Major Currencies
Against U.S. Dollar
Chart 9 - 3-month Forward Exchange Rates
1
2
3
4
5
6
7
8
-
OFFICIAL USE ONLY
Table 3.
United Kingdoms
Treasury Bill Yields and Exchange Bates
3HKO« Treasury bill arbitrage calculation
U.K.
U.S. Differ*- 3-mo,
In favor
ence
pounds
U.K. bill
1962
High
Low
April
5
11
19
26
3
10
17
2k
31
.7
11
21
28
5
12
May-
June
July
3.78
k.25
3.66
3.59
3.59
3.66
3.66
3.63
3.56
3.56
3.61
3.59
3.56
3.63
3.63
3.72
3.72
2.73
2.7k
2.89
2.88
2.87
2.87
2.87
2.89
2.88
2.93
2.97
2.97
2.97
2.96
2.97
3.01
3.19
-0.31
-1.92
-1.09
-1.19
-1.13
-0.89
-0.73
-0.7k
-0.69
-0.73
—0. 6k
—0.67
—0 06I4.
-0.56
-0.53
-0.U9
-0.U3
1.05
1.51
0.77
0.71
0.72
0.79
0.79
0.7k
0.68
0.73
0.6k
0.62
0.59
0.67
0.66
0.71
0.53
0.7k
-o.iil
-0.32
-0.U8
-O.kl
-0.10
-0.06
—
——
——
-0.05
-0.05
+0.11
+0.13
+0.22
+0.10
Spot
London deposit rates
pound
U.S.
Local
(U,S, / dollar
authority
cental (3-ao.)
281.75
279.97
280.09
280.07
280.10
280.06
280.97
280.90
280.9k
279.97
280.01
280.OL
280.00
280.Ok
280.06
280.12
280.11
U.13
3.kk
3.69
3.69
3.66
3.72
3.73
3.81
3.8k
3.91
3.8k
3.91
3.8k
3.78
3.8k
3.91
3.9k
k.87
hoi 9
k.56
k.56
k.56
k.56
k.56
k.5o
u.uu
k.kk
k.kk
k.kk
k.31
k.25
k.3l
k.31"
—
a/ Market quotation for Friday. The 1963 figures, assembled for arbitrage calculations, are
the premiums on the U.S. dollar, b/ Noon buying rate in New York.
Table 9.
h-l/2%
• 196k
1962 - High
Low
April
h
10
18
25
May2
9
16
23
30
6
June
13
20
27
July
k
11
a/
b/
United Kingdom:
Selected Capital Market Yields
U.K. Government bond yields
3-1/256
5-1/2$
3%
1965-75 2008-12 War Loan Consols
6.28
5.85
5.00
3,90
k.oi
5.32
5.27
3.87
5.21
3.80
5.27
3.75
3.65
5.25
5.23
3.72
5-15
3.70
5.1U
3.72
5.06
3.67
5.03
3.65
3.67 ' 5.13
5.03
3.65
1.56
5.01
5.oo
3.65
5.00
3.75
6.35
5.k5
5.85
5.83
5.70
5.73
5.73
5.68
5.63
5.60
5.55
5.52
5.57
5.53
5.50
5.50
5.50
6.77
U.80
5.90
5.87
5.75
5.77
5.7k
5.70
5.65.
5.66
5.60
5.59
5.68
5.60
5.5k
5.53
5.57
6.57
5.51
5,76
5.72
5.60
5.62
5.59
5.56
5.k6
5.5o
5.k2
5.kl
. 5.5k
5.kk .
5.39
5.39
5.k3
Share
yield
5.15
5.78
5.03
5.09
k.93
k.91
k.&9
k.95
k.9k
k.99
k.99
5.02
5.1k
5.06
5.08
5.01
5;0O
Yield
gap
Share
prices
l.k2
-0.27
0.73
0.63
0.67
0.71
0.70
0.61
0.52
0.51
0.k3
0.39
O.kO
0.38
0.31
0.38
0.k3
309.6
261.3
303.3
30k. 3
311.3
313.1
31k 0 2
310.5
3lk.l
311.0
311.0
311.0
^303.7
308.7
307.3
311.6
312.3
Financial Times.
'
Difference between yield on 2-1/2 per cent Consols and share yield#
INTEREST ARBITRAGE, U N I T E D S T A T E S / C A N A D A
Thursdoy figures
F
i
~P
I
1—-l~
3 - M O NTH TREASURY BILL RATES
U N I T E D STATES
I I I I I I I I 1 II
i
i
I 1 I I I I I M
I 1 I 1 I I I 1 I I I 1 I I I I I I 1 I I I I I I I I
i
i
i
i
i
r
f
RATE D I F F E R E N T I A L A N D F O R W A R D C A N A D I A N D O L L A R
I
F O R W A R D RATE
Dlscovel -
\
j
'
^
I '
I—
1—
^ — I
I
— 1.
1
I, ~
I 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
-
f
a
*
NET I N C E N T I V E I N EAVOR Of
i i I i i l.-Li l.i i
T
7
s
d
ii
~i
i iJ i i J i i
7
s
o
*
CANADA +
ii
ii J. Li.
T
s
d
Li. I i i L L L L L I
i
7
T
T
I i_h
a
INTEREST ARBITRAGE, NEW Y O R K / L O N D O N
3 - M O N T H TREASURY BILL RATES
V
I
LONDON
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 S T E R L I N G
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
.! 11 i .! , 1 1.1.1 1
1963
X
,
INTEREST 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
Per cent per annum
_3-.MONTH TREASURY B I L L S , I N T E R B A N K L E N D I N G RATE A N D
E U R O - D O L L A R D E P O S I T RATES
GERMAN INTERBANK
I 1 0 A N RATE
: " k-M
I
L
I
I
t
RATE D I F F E R E N T I A L A N D F O R W A R D DEUTSCHE M A R K
SPREAD I N FAVOR OF F R A N K F U R T :
F O R W A R D RATE
DISCOUNT ( — )
I N T E R B A N K L O A N RATE
TREASURY B I U S
I I I I I I I I I I
i
1
1—:
!
i
i
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 FAVOR OF F R A N K F U R T { + )
' V I N T E R B A N K 1 0 A N RATE
V
\
TREASURY BIUS
\\
INTEREST A R B I T R A G E , F R A N K F U R T /
LONDON
Friday figures
3 — M O N T H TREASURY BILLS A N D I N T E R B A N K L E N D I N G RATES
P.r cent per annu
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
JJ
FV
f ^ s '
\VGHMAN TREASURY M T $
V
G E R M A N I N T E R I A N X L O A N BATE
V
RATE DIFFERENTIAL W I T H F O R W A R D E X C H A N G E COVER
7\
1961
1962
1963
CHOF S
'
SHORT-TERM
INTEREST
•
RATES *
I-'
I
1
s /7"V
\
>—•]*EURO-DOHAK - 10MD0N-V —
CANADA
f
"X* 3-monlh ireosury bill roles I or oil countries except Japan (3 month interbank deposit rale) and Switzerland (5 month deposil Taie^
"j
3 month rate I or U 5 dollar deposits in London
L O N G - T E R M B O N D YIELDS
W
I N D U S T R I A L STOCK I N D I C E S '
1958 = 100
I960
• Note:
Jopon:
index of 225 mdvslnol and other Mocks traded on the
1963
Tokyo exchange.
SPOT E X C H A N G E RATES - M A J O R CURRENCIES A G A I N S T U . S . DOLLAR
Above
par
VTZ
GERMAN MARK
/
V-'
Above
*±
$
1961
0
N
D
i
f M A
M J
J
1962
A
S
O
N
D
J
F
M A M J
J
1963
A
S O M
D
pa
3 - M O N T H F O R W A R D E X C H A N G E RATE
Friday
I i q ores
A G A I N S T U. S. D O L L A R S
,
A G A I N S T P O U N D STERLING - L O N D O N
A G A I N S T P O U N D STERLING - L O N D O N
1962
P.r e n . p . , onnum
@FedFRASER