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D,VISION OF I N T E R N A T I O N A L F I N A N C E BOARD O F GOVERNORS F E D E R A L R E S E R V E SYSTEM H. 13 No. 271 October 26 i 1966. CAPITAL MARKET DEVELOPMENTS ABROAD United Kingdom Ten Charts on Financial Markets Abroad Latest Figures Plotted in H.13 Chart Series, 1966 i. ii. III. I. United Kingdom: Money and Capital Market Developments, End-May to Mid-October, 1966 British financial markets experienced a major crisis from the end of May until mid-September and then staged a sustained recovery from mid-September until mid-October. Fears that the domestic inflationary process within Britain might culminate in a devaluation of the pound produced a major run on sterling and pushed yields on British government securities to record levels. By early September, long-term bond yields were over 7 per cent, about 50 basis points above the May 27 level. (See Table 1.) Table 1. United Kingdom: Selected Financial Market Indicators May-October 1966 (per cent per annum) f / Change from: July 29Sept. 9Sept. 9 Oct. 7 Actual May 27 May 27July 29 5.67 1.03 .07 -.10 -.03 6. 63 6.50 6. 71 6. 70 6.82 6.80 .55 .51 .47 .35 .36 .30 .09 .23 .15 .15 -.58 -.36 -.30 -.15 -.18 0 +.03 -.08 -.10 -.10 6. 77 6. 98 7.02 7.07 7.03 5.75 5.88 .62 .87 .38 .56 0 -.56 0 0 Industrial stocks b/ c/ Price index Share yield 118.24 5.16 -11.98 .57 -8.42 .49 1.15 -.12 .01 -.01 99.00 6.09 Exchange rates Spot (U.S. cents) Forward 279.14 -.65 -.07 -.95 -.36 . 70 +.51 .07 .02 .05 279.24 -. 78 Interest rates Treasury bill (maximum tender) Government 3% 57, 3-1/2% 5-1/2% 3-1/2% - bonds b/ 1959-69 1971 1979-81 2008-12 War loan Euro-dollar 90 -days 180-days Oct. 7Oct. 14 Actual Oct, 14 ' a/ Except stock price index and spot exchange rate, b/ Entries are for days preceding ones shown. c/ Financial Times 500 industrials. " OFFICIAL USE ONLY fDecontrolled after six months) 6. 75 6. 75 OFFICIAL USE ONLY But the pound rallied in mid-September and, despite a continued tightness of money, prices of government securities began a sustained advance. . le announcement of enlarged international currency swap arrangements, an increase in exports for the month of August and optimism about the balanceof-payments outlook expressed in the Bank of England's Quarterly Bulletin coincided to produce on September 14 and 15 a firmness in the sterling rates and active demand for gilt-edged securities. This demand continued to push gilt-edged yields down until early October; by October 7, the longer term government yields had regained about one-third of the ground lost during the preceding three months. (See Table 1.) The foreign-exchange crisis induced the British authorities to introduce a strong stabilization program. On July 14, Bank Rate was raised from 6 to 7 per cent and special deposits were doubled. This was followed on July 20 by a range of restrictive measures, including: higher excise and purchase taxes; reductions in public spending; stiffer terms on installment credit; and greater government control over construction activity. Direct measures were also taken to improve the balance of payments: civilian and government spending abroad were cut. In addition, the government inaugurated a voluntary price-wage freeze in July as a crucial element in its stabilization program. Reluctantly, labor and business accepted the objectives of the program and, in August, Parliament also provided legal powers to enforce the freeze. Gradually from August to October, Britain's trade unions and the Labor party acquiesced in the need for an effective wage-price standstill enforced by legislation. The turnabout in the position of sterling in mid-September was in part an outgrowth of the promise that enlarged international credits were available from foreign central banks to support the pound. But the government's determination to enforce the wage-price freeze and the publication of evidence that excess demand in the British economy was being reduced contributed to the strengthening of financial markets. The rises in gilt-edged prices, however, were concentrated mostly in the intermediate- and long-term sectors of the market. Treasury bill yields declined only 10 basis points between September 9 and October 7 (see Table 1) and there are as yet no reports in the financial press of a prospective decline in Bank Rate. During the recent continuing demand for gilt-edged securities by non-bank investors, the Government Broker's holdings of one of the "tap" issues being used to anchor the yield c u r v e — F u n d i n g 6 per cent maturing in 1993--were reported in the financial press to be exhausted. On October 7, the Treasury replaced a shorter tap issue with a £700 million 1971 offering at a 6-3/4 per cent coupon priced at 99-1/4. On October 24 a long-term issue was announced--a £400 millicr r f f d a t e c * 1995-93, with a 6-3/4 per cent coupon, " i c e d at 97-1/2 to yi:ld 6.55 per :cnt to maturity. OFFICIAL USE ONLY OFFICIAL USE ONLY Money market rates rose in July. Money market interest rates were steady from the end of May until Bank Rate was raised on July 14 and then moved up about one percentage point. Since mid-September, short-term rates have eased only slightly despite strengthening demand in other credit markets (See Table 2.) Table 2. United Kingdom: Selected Money Market Rates May-October 1966 r\ /mr annum) Q n n n m\ Z /•% v cent n n n f - per (per May 27 July 1 Aug. 5 Sept. Call money 5.50 4.38 6. 62 Deposit rates Local authority 2 -days 90-days 5.88 6.25 6.00 6.41 Euro-dollars Call 90-days 5. 28 5. 75 Treasury bill (market rates) 5.59 October 7 14 6.62 6.63 6.63 7.25 7. 62 6.94 7.50 7.13 7.38 6.94 7.47 5.63 5.94 6.00 6.38 6. 12 6. 75 6.00 6.00 6.75 6. 75 5. 66 6.59 6.69 6.61 6.53 Call money rates have remained virtually unchanged since Bank Rate rose July 14. To assist the discount houses, the Bank of England introduced a major innovation in lending practice on June 30 when it began to extend overnight loans to the discount houses. The Bank explained this move as an effort to introduce greater flexibility into the money market. The previous minimum period had been seven days. Bank Rate was charged on overnight loans in July and August. In September and the first half of October, rates which were below Bank Rate were also applied to such loans for the first time. Local Authority deposit rates remain high, though the rate on 90-day deposits has eased slightly in the last two months. Withdrawal of foreign futlds has exerted upward pressure on local authority deposit yields. Rates on Euro-dollar deposits, a competitive investment, followed an upward path from the end of May to mid-September. Yields on shorter term-to 30 days--have dipped slightly since then. Rates on 90- and 180-day deposit however, have not fallen. Even though the rise in Euro-dollar rates was less steep than for local authority deposits from May to mid-September, the covered differential remained appreciably in favor of Euro-dollars; the widening gap in uncovered yields was offset by a widening of the forward discount. (See OFFICIAL USE ONLY - 4 - OFFICIAL USE ONLY bottom panel, Chart 2,) The covered differential continues to be in favor of Euro-dollar deposits, but the gap has narrowed as local authority rates, at least for 90- and 180-day maturities, have risen. (See Table 6.) The Treasury bill rate moved up one per cent after Bank Rate was raised and has since remained stable at the higher level. Economic slowdown is reflected in private credit extensions. Recent statistics on extension of credit in the private sector suggest a slowdown in domestic business activity. Advances by the clearing banks, seasonally adjusted, fell sharply in August and declined again, even more sharply, in September. Similarly, installment debt outstanding fell by £23 million in August, reflecting the stiffer terms--in the form of larger down payments required and shorter maximum repayment periods--imposed by the government in August on Englishmen buying on time (see Table 3), Not since April of 1965 has total installment debt outstanding been as low as in August. Table 3. United Kingdom: New Borrowing by the Private Sector 1965-1966 (Em: monthly or monthly average) 1965 III IV I Bank advances a/ Actual Seasonally adjusted -10 18 -28 8 48 23 Installment credit b/ II III 1966 July Aug- Sept. - 3 23 -50 -33 116 45 -136 - 55 -129 - 90 3 - 23 49 29 39 n.a. 119.2 118. 3 3 - 2 -4 Net issues of U.K. corporations c/ 45 49 84 46 Advances by building societies 73 98 99 115 . 2 n. a. 79 n. a. al London clearing banks. b/_ Finance houses and department stores. cf Net of redemptions. The credit story is not one of across-the-board declines. Net issues of United Kingdom corporations did fall in July and August but doubled in September. This steep rise was due, however, to the anomaly of a very large issue by one company, I.C.I., which offered a £60 million issue at a coupon of 8 per cent. Advances by the building societies in July and August ran ahead of the monthly average for the third quarter last year and of all subsequent quarters as well. OFFICIAL USE ONLY - 5 - OFFICIAL USE ONLY Bond market rallies in September. Conditions in the bond market deteriorated steadily from the end of May until mid-September but there has since been a vigorous recovery. To replace supplies of a shorter-term bond available to the authorities on a tap basis which had been sold out during the recent surge in demand ; some £700 million of a 6-3/4 per cent bone vrturing in 1971 was announced on October 7, Stock prices fluctuated within a narrow range during June but slid steadily downward through July and August. They firmed during September but have edged off ir. October„ The prolonged sinking spell in Wall Street may have been a factor in the wavering in the British stock market 3 but the recent improvement in New York has brought no concomitant rise in British equity prices. The present deflationary climate, while contributing to demand for bonds, probably helped to unsettle the stock market. There are reports of widespread substitution of bonds for stocks, encouraged by high bond yields, uncertain domestic growth prospects, and the stabilization of dividend payments under the government's program. Foreign trade deficit narrows. The IL K, 's foreign trade deficit (on a balance of payments basis) was £50 million in July, £15 million in August and was only £2 million in September (see Table 4)„ The improvement in Britain's foreign trade returns was certainly a factor strengthening confidence in sterling and contributing to the higher exchange rates. (See Charts 8 and ?.) Table 4. United Kingdom: Foreign Trade 1965-1966 TEm: seasonally adjusted) 1965 I II July 1966 Aug. Sept. III Imports (c.i.f.) 1,514 1,488 528 524 493 1,547 Exports (f.o.b.)a/ 1,288 1,231 423 457 444 1,324 - 226 - 257 -105 -69 -49 -223 - - 104 - 50 -17 - 2 - 71 a/ Includes re-exports, b/ Adjusted to balance of payments 69 ' Trade balance b/ I Difference However, the September figures in particular are deceptive as a measure of Britain's underlying foreign trade position. For, though the deficit narrowed, the improvement stemmed chiefly from a drop in imports rather than from an increase in exports. The drop in imports may in part have been in anticipation of the removal of the surcharge on imports in November. OFFICI.AL USE ONLY OFFICIAL USE ONLY Foreign exchange holdings rise. There was a rise of official holdings of gold and foreign exchange in September, the first in seven months. The rise was modest—amounting to only $8 million—but was achieved without aid from foreign central banks (see Table 5). Table 5. United Kingdom; Official Holdings of Gold and Foreign Exchange 1966 (millions of U.S. dollars) Actual stock at end of May Gold and foreign exchange 3,413.2 Change from preceding month: June July Aug. Sept. -137.2 - 70 -53.2 Sterling gains strength in September. The spot during June and most of July, though it did move up after package was announced. However, the pound declined again weak until recovery began in mid-September. (See Table 6 Table 6. Exchange rates Spot (U.S. cents) Fwd. (p. c. p. a.) Three-month yields and yield spreads Treasury bills U.K. (covered) U.S. Difference Deposit rates Local authority (covered) Euro-dollar Difference Euro-dollar a/ N.Y. C.D. 's a/ Difference 8.4 Actual stock at end of Sept. 3,161.2 pound remained weak the July 20 austerity in August and stayed and Charts 8 and 9.) United Kingdom: Exchange Rates and Arbitrage Calculations May-October 1966 September 30 October 14 May 27 June 24 July 22 Aug. 26 9 279.14 - 0.65 278.94 - .61 279.10 - 1.43 278.82 - 1.05 278.71 - 0.90 279.15 - .94 279.22 - .83 279.24 - .78 4.85 4.61 .24 5.00 4.31 .69 5.05 4.85 .20 5.52 4.99 .53 5.65 5.16 .49 5.66 5.30 .36 5. 75 5.34 .41 5.66 5.45 .21 5.60 5. 75 - .15 5.74 6.12 - .38 5.95 6.31 - .36 6.51 6. 75 - .24 6.60 6. 75 - .15 6.50 6.88 - .38 6.55 6. 75 - .20 6. 69 6. 75 - .06 6.00 5.50 .50 6.44 5. 70 .74 6. 75 5.85 .90 6.62 5.84 .78 5.62 5.40 .22 a/ For two days before listed date. 6.62 5.77 .85 7 6.88 5.82 1.06 b/ For three days before listed date. OFFICIAL USE ONLY 7.00^/ 5.8 4 / 1.18 OFFICIAL USE ONLY - 7 - The forward discount on the pound was relatively narrow during June-less than one per cent per annum--but widened at the end < f July;' it reached a peak discount against the spot rate of over 1.5 per cent in the first half of August. The gap between spot and forward narrowed in the latter half of August. The trend toward closing the gap has continued to the present time, as forward has recovered somewhat more strongly than spot. The covered differential in Treasury bills hac fluctuated within a relatively narrow range of about 50 basis points during the period under study but has been in London's favor throughout. The trend in recent weeks has been toward reducing the differential. The easing of the British rate has been roughly offset by the narrowing of the forward discount; but the U.S. rate has continued to rise. The difference between Euro-dollars and N.Y. CD's has been in favor of Euro-dollars: Euro-dollar rates have risen more rapidly than those on CD's. The cover differential between local-authority deposits and Euro-dollars was discussed above. London gold price softens. The price of gold at the fixing in London has followed an erratic pattern in the period covered, but the price was generally higher.in the July-September period than it had been in June. A downward trend in the price has been evident thus far in October, a development in part associated with the revival of confidence in sterling. (See Table 7.) Table 7. Dollars per fine ounce United Kingdom; May 7 July 1 35.1438 35.1668 London Fixing Price for Gold August 5 35.1917 Prepared by •, Martin J« Kohn,_ Economist, Europe and British Commonwealth Section, Division of International Finance. OFFICIAL USE ONLY September 9 7 October 14 35.1801 35.1592 35.1510 NEW YORK, L O N D O N , MONTREAL: YIELDS POR U . S . D O L L A R I N V E S T O R S O N 3 - M O N T H FUNDS DOLLAR D E P O S I T RATES: NEW Y O R K - L O N D O N RO DOLLAR D E P O S I T U . S . C E R T I F I C A T E OF D E P O S I T I Kr ' . EURO DOLLAR OVER I U l | L - U / S , C E R T I F I C A T E OF D E P O S I T , FINANCE CO. , PAPER RATES ( c o v e r e d ) : | , \ / X, QUOTED , I | , IN N E W Hf | YORK CANADIAN FINANCE . COMPANY I U . K . HIRE P U R C H A S E U . S . FINANCE COMPANY Mar. !•». 1964 Sept. Dec. Mar. Jua. 1965 Sept. Dec. Mar. Jua. 1966 Sept. Dec. L O N D O N : YIELDS FOR U . S . DOLLAR I N V E S T O R S O N EURO DOLLAR DEPOSIT 3-MONTH FUNDS RATES 1 8 0 DAY 9 0 DAY CALL 30 DAY- I'HIRE PURCHASE A N D LOCAL AUTHORITY DEPOSIT RATES (covered) EURO DOLLAR D E P O S I T HIRE P U R C H A S E DIFFERENTIAL FAVOR HIRE P U R C H A S E I 1 FAVOR E U R O D O L L A R LOCAL A U T H O R I T Y D E P O S I T EURO-DOLLAR D E P O S I T FAVOR LOCAL AUTHORITY DIFFERENTIAL FAVOR EURO-DOLLAR 1964 1965 1966 1 [INTEREST A R B I T R A G E ; F R A N K F U R T / L O N D O N , FRANKFURT INTERBANK LOAN RATE V S . ZURICH/LONDON] LONDON EURODOLLAR RATE (COVERED) IN T E R M S O f DM I N T E R B A N K LOAN RATE EURODOLLAR DIFFERENTIAL ' I ZURICH DEPOSIT RATE V S . LONDON EURO DOLLAR FAVOR EURO-DOLLAR I 1 I I 1 I I 1 I I RATE ( C O V E R E D ) IN T E R M S 7 O V V ^ K 5 S B4\*NCS S W I S S D E P O S I T RATE 1 1 1 • i 1 DIFFE RENTIAL 1 FAVOR ZURICH FAVOR EURO- DOLLAR 1 1 H 1 1 1 1 1 PRICE OF G O L D I N L O N D O N 1 1 1 I 1 1 1 l 1 1 1 1 1W Y T 1 1 1 1 6 INTEREST A R B I T R A G E UNITED S T A T E S / C A N A D A Friday figvr«« i r i i i 3 - M O N T H T R E A S U R Y BILL R A T E S - - " l I I I I UNITED STATES I 1 I J I i 11 II II II I l I I I I I I I I BILL R A T E 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 I I DOLLAR SPREAD I FORWARD RATE 3-MONTH DISCOUNT I I I I 1 1 1 1 1 1 C O V E R E D RATE D I F F E R E N T I A L S (NET I N C E N T I V E S ) PRIME FINANCE PAPER FAVOR U . S . FAVOR CANADA TREASURY BILLS FAVOR U S INTEREST A R B I T R A G E , Friday figures 3-MONTH U.K. TREASURY NEW BILL LOCAL AUTHORITY YORK/LONDON RATES DEPOSITS NEW RATE DIFFERENTIAL FORWARD STERLING SPREAD AND YORK 3-MONTH | I I IN F A V O R O F L O N D O N PREMIUM 0 DISCOUNT FORWARD RATE i RATE DIFFERENTIAL WITH FORWARD EXCHANGE COVER (NET INCENTIVE) IN F A V O R O F L O N D O N IN F A V O R 1963 OF NEW YORK 1964 1965 1966 SHORT-TERM INTEREST RATES * U.K. I E U R O - D O L L A R - LONDON U.S., SWITZERLAND JAPAN GERMANY CANADA U.S. 1962 * 1963 1964 1965 3 month treasury bill rotes for all countries except Japan '(Average rate on bank toons and discounts ) Switzerland (3 month deposit rate) and Ger many (interbank Loan Rote) "~j~^ 3-monih rote (or U S dollar deposits in London 1966 v\ LONG-TERM BOND YIELDS GERMANY EURO DOLLAR B O N D S * NETHERLANDS SWITZERLAND 1962 1963 1964 1965 1966 EXCHANGE R A t t S - MAJOR C U R R E N C I E S A G A I N S T U . S . DOLLAR S W I S S FRANC GERMAN MARK i U.K. STERLING FRENCH FRANC | I BELGIAN FRANC X - 1 & .4 t DUTCH GUILDER % V i 7 I \ CANADIAN DOLLAR J A P A N E S E YEN | i do,,I i .4 3-MONTH AGAINST Fridoy figurei FORWARD U.S. EXCHANGE DOLLARS —NEW RATES YORK G E R M A N MARK S W I S S FRANC | V POUND STERLING PISCOUNT- 2 PREMIUM + DUTCH GUILDER FRENCH FRANC C A N A D I A N DOLLAR DISCOUNT- AGAINST POUND STERLING — L O N D O N PREMIUM* S W I S S FRANC r/v G E R M A N MARK J, U . S . DOLLAR M J 11964 S D S M 1965 D M J 1966 S D INDUSTRIAL STOCK INDICES 300 SWITZERLAND 250 GERMANY U.K. 200 U.S. 150 100 300 250 JAPAN 200 CANADA 150 100 1963 1964 ^ Sw in Bank Corporation industrial stock index. " Japan: index of 225 industrial and other stocks traded on the Tokyo exchange 1965 1966 19(5 H. 13 No.271 III. Latest Figures Plotted in H.13 Chart Series, 196S (all figures per cent per annum) Upper Panel Chart 1 (Wednesday, Oct. 19 ) 6.75 Euro-$ Deposit Chart 5 (Friday, %ct. ^ Treasury bills: ) 6.47 TTTT U.K. U.S. U.S. certif. of deposit Lower Panel (Friday, Qct ° U.S. Canada Hire-purchase paper, U.K. Spread favor U.K. +1.16 Forward pound -0.52 21 Finance co. paper: Chart 2 (Friday, Oct. 21 7.05 6.79 Chart 6 (Friday, Oct. 14 ) Treasury bills: Euro-$ deposits: Call 7-day 30-day 90-day 180-day 6.25 6.50 6.81 6.75 6. 75 Hire-purchase paper 6. 84 (Oct. 14) Local-authority deposit 6.59 (Oct. 14) Chart 3 ) Upper Panel (Period: Oct. 8-15 Interbank loan (mid-point) (Date: Aug, 15 4.25 Zurich 3-mo. deposit Price of gold (Friday, Oct. 14 7.19 6.97 Euro-$ deposit (average) Lover Panel Net incentive (U.K. + ) 35.151 5. 31 t. 47 5.01 U.S. U.K. Canada Interbank loan rate (German) (October 8-15) Euro-$ deposit (London) Zurich 3-mo. deposit (Date: August 15 Japan composit rate (Date: June 30 7.19 6.7:3 ) „) Chart 7 ) 4.7- U.K. War Loan (Thurs., Oct. 13) 7.03 German Fed. (Fri., O c 1 A 7. 90 U.S. Gov't. (Wed. , Oct. 19 ) Swiss Confed. (Fri., Oct. 1- ) 4.09 Canadian Gov't. 5.;7- ) Chart 4 (Friday, Oct. 14 Canada U.S. Spread favor Canada 5.01 TUT Forward Canadian $ +0.37 Net incentive (Canada + ) 4-0.07 Treasury bills: Canadian finance paper (Wad. JPc1.19 Netherlands Gov't perpetual 3% (Friday, C:-r. 14 ) ) 6.12 Euro-$ bonds (Fri., Oct. 21 ) 91 to 63 For descriptions and sources of data, see special supplement to H.13, Number 239, March 16, 1966.
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