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D I V I S I O N OF I N T E R N A T I O N A L F I N A N C E
BOARD OF GOVERNOR#
H. 13
No. 163
September 16, 1?6U.
CAPITAL MARKET DEVELOPMENTS ABROAD -
,
I. United Kingdom
II* Nine Charts on Financial Markets Abroad
I* United Kingdom: Money and Capital Markets in August
Conditions in domestic financial markets in the United Kingdom were
relatively stable during August, despite the weakening position of the pound
in the foreign exchange market. In the first two weeks, both the gilt-edged
and stock markets recovered from the mid-July shake-out that followed the
announcement of a large trade deficit for June. (See Table 1.5 At mid-August,
the announcement of an only slightly reduced trade deficit for July momentarily
retarded this improvement. However, by the end of the month, demand had
revived in both markets and share prices were above and bond yields below their
August 21 levels. Throughout the month, the Treasury bill yield remained
unchanged, but the spot pound declined from 278.81* U.S. cents on July 31 to
278.32 on September 11.
Table 1. United Kingdom: Selected Financial Indicators, July-September 196H
Treasury bill
3 months tender
Government bonds
~ W
1965 v
3-1/2* 1979-1981
5-1/2* 2008-2012
3-1/2* War Loan
July
_JL
_ L
U.65,
U.65
U.65
U.93
5.88
6.18
6.2k
U.96
5.88
6.15
6.21
U.97
5.83
6.13
6.18
Stock market price
indices
Financial Times
,
Industrial ordinary-/ 356.6
Exchange rates
Spot rate (U.S. cents) 278.81
Forward discount
(per cent per annum)
-.67
August
356.5
365*9
278,85
278,75
-.72
-.67
ZHE
September
3 u
_3Ju
U.65
U.65
U.65
U»65
5.0U
5.85
6.15
6.22
U.85
5.82
6.15
6.22
U.89
5.82
6.15
6.22
U.93
5.85
6.15
6.22
. 358 oU
363.8
366.7
366.U
278.-59
278.^3
278.39
278.32
-,60
->65
-#62
-*65
a7 Previous Thursday.
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(Decontrolled after six months)
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~
2
-
During early September, prices of gilt-edged bonds held firm and
stock prices advanced further. Market activity was stimulated in part by
public opinion polls favorable to the return of the present government. On
September 10, the Fjjiancial Times industrial stock index was at 366.1; compared
with 356.6 on July 31 and 358.U on August 21. (See Table 1.)
On the external side, reserve losses of about $92 million in August
suggest that the authorities were permitting the exchange rate (instead of
the reserves) to absorb selling pressures associated with electoral and export
uncertaintieso For the first six months of 196U, the $3U0 million increase
in the sterling balances of the outer-sterling countries were equivalent to
about half the U.K.'s own balance-of-payments deficit for the period,
The covered differential in favor of the U.K. Treasury bill over the
U.S. bill fluctuated between 31 and U2 basis points during August. (See
Table 10 and Chart 3.) However, the covered yield of the U.K. hire purchase
deposit was about fjOJsasis points above the yield on U.S. finance paper during
the month. (See Chart 1.) The differential on the Euro-dollar deposit over
the U.S. certificate of deposit was stable during August at around 39 basis
points after declining during July. (See Chart 1.)
No United States dollar loans in London were reported for August.
However, on August 31 > a Danish power consortium made known its plans to raise
about $10 million sometime during September.
Money market shows mixed behavior. Call money rates tightened
noticeably during the month, but those on Treasury bills remained stable.
Rates on local authority deposits eased during the second week, but remained
stable thereafter. (See Table 2.) The higher call money rates were generally
attributable to tax collections outpacing expenditures and normal seasonal
factors. The Bank of England provided support throughout the month by buying
bills, but there was no borrowing by the discount houses.
Table 2. United Kingdom; Selected Money Market Rates: July-August 196k
(per cent per annum)
—
July
August
28
21
lk
31
7
Call money —/
Local Authority
deposits (90-days)
Euro-dollar
(90-days.)
Treasury bill-market
rate (3-months)
W8
U.25
U.00
U.25
5.06
5.06
5.00
5.00
5.00
U.25
a.19
U.25
U.25
U.25
k.50
U.5o
U.5o
>.50
a .50
a/ Estimated from a range of rates quoted in the Financial Times.
U.50
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- 3 -
Capital markets continue strong/ The demand for gilt-edged bonds
which had been strengthening through the first two weeks of August, eased after
the announcement of the trade deficit on the 1 ^ - This weakness was short-lived,
for in the following week most rates declined in response to revived demand,
There was no noticeable change in the shape of the yield curve * The stock market
exhibited a similar pattern, The growing demand for equities wa.s also interrupted, but only temporarily, and prices began to rise once more during the
final week.- (See Tables 1 and 3«)
In the local authorities market three developments are worth notingo
First, effective August 6, the Public Works Loan Board's rates were raised an
average of one-eighth of one per cent, (See Table 4«) The last increase was
made in May of this year. Second, the response of the local authorities to the
opening of the short-term.bond market has been appreciable—the queue has risen
to over 15)0 authorities—and the Bank of England has placed a minimum of one
quarter of a million pounds on any single issue, in order to reduce the number
of borrowerst Third, an urban district, the first since before the war, successfully floated a 900,000 pound issue in the stock market, thus breaking the three
million pound rule that had hitherto been in force, and extending the scope of
the local authority bond market,
Table 3*
Government
~TJ
3%
5%
2-1/2%
United Kingdom:
Selected Capital Market Yields: July-August 1964
bond yields
1957
1965-1975
1986-1989
Consols
Stocks
Share yield a/
Yield gap
b/
Share prices a/
August
20
July
-3£_
6
13
5,W
5; 81
6,10
6.06
5,42
5*8o
6r08
6 7 06
5,43
5,76
6=05
6,01
5,45
5.80
6,08
6,05
5,47
79
6.07
6.04
4,59
4.51
1-47
1*50
116*40 118,77
4,59
1,44
116,87
4.56
1.48
117.53
4,58
1,48
116,43
27
a/ Financial Times ~ Actuaries 500 share index (April 10, 1962=100),
bf Difference between yield on Consols and share yield,
New issues (net of redemption) totaled U7 million pounds in August-—
down appreciably from the May-July average of 60 million pounds per month.
(See Table 5<) The decline was concentrated wholly in the "quoted public
companies" segment for local authorities borrowing continued to increase and
no overseas borrowing was reported,
-
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I
- U -
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Table U»
~~~~
United Kingdom:
'
I n t e r e s t
May
Last
Quota Loans
resort loans
b
b
Length of Loan
in years
;. 0 >.. .
i-uSn 5
More than 5 but
-.;:t vver 10
More than 10 but
not over 15
More than 15 but
over 25
I-iorc than 2.;
a/
y
Public Works Loan Board Rates to Local Authorities
(per cent per annum)
S - iA
5-7/8
5-3/8
5-7/8
R a t e s
A u g u s t
Last
r e s o r t loans
b
a
Quota loans
b
a
5-5/8
5-5/8
6-1/8
6-1/8
5-3/8
6
6
5-5/8
5-7/8
6-1/8
6-1/8
5-1/2
5-7/8
6
6
5-3/U
6
6-1/8
6-1/8
5-5/8
JL
6
5-7/8
6
6-1/8
6-1/8
6-1/8
5-7/8
6
6-1/8
6-1/8
6-1/8
6-1/8
6-1/8
6-1/8
5-3/8
Installment loans
Loans repaid at maturity.
Table 5,
United Kingdom:
Capital Issues (Net of Redemptions): Hay-August 196U
(millions of pounds]
•
_May
U.K. quoted public companies
U,K. local authorities
Overseas borrowers
Total
L8.9
U«5
2,3
55,7
Gross issues
Gross redemptions
65,6
9.9
Source:
'
.
June
July
August
3U,0
7,1
9,2
50,3
65,0
10,3
0,9
76.-2
28,5
18,5
ii7.0
'89.0
12,8
U9.2
2.2
5W
Bank of England,
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——
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Bank lending increases during the quarter ending in August* Although
the effects of the postal strike continue to affect the monthly figures, the
average of monthly advances by the London clearing banks during the quarter ending August 15, was substantially higher than earlier in the year• (See Table 6#)
Since little seasonal change is expected during this most recent quarter# the
average monthly increase is set at 50 million pounds—lU million pounds more
than the increase for the first five months on a seasonally adjusted basis.
On the other hand, much more modest increases in installment credit
were noted during, the quarter ending in June• Total credit outstanding stood
at l,0i;2 million pounds in June; as a result the average monthly increase for
the second quarter was 29 million pounds.
Table 6.
b/
Advances —
Call loans
Other bills
Other investments
Total
aA
United Kingdom: Bank Lending- to the Private Sector:
May-August 196U
(millions of pounds)
Average
, monthly change
August
March-May June-August
June
Juljr
1193
228
362
123
U906
1*221*
202
336
123
1*915
1*327
206
382
123
5038
1*353
202
382
123
5060
15
7
2
0
25
40
- 9
13
0
51
a/ As reported by the London Clearing Banks. Amounts are those outstanding
at mid-month*
b/ Less items in transit and advances to nationalized industries.
Source t Bank of England*
Trade deficits continue as exports decline. In July, exports declined
for the second consecutive month, but the fall in imports prevented a further
deterioration of the trade deficit. In fact, there was some improvement here
for on a balance of payments basis the deficit narrowed from 62 million pounds
in June to 39 million pounds in July. (See Table 7.) However, for the three
months ending July 31 the average monthly payments deficit was 11 million pounds
greater than the average for the preceding three months.
Reserve losses not appreciable, but spot rate drops noticeably. The
continuing trade deficits and the apparent practice of continental holders to
switch from sterling to Euro-dollars has placed some pressure upon Britain's
reserve position. Yet, losses to date—including $92 million in August—have
not.been appreciable. (See Table 8.) Official policy appears to be that of
permitting the exchange rate to absorb the pressure instead of reserves, Indeed,
during August the rate was allowed to drop from 278.8b to 278.1*3 (U.S..cents),
(see Tables 1 and 10) although some support was given intermittently.
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I
- Table 7= United Kingdom: Foreign 'Trade, May-ddly, l?6k
(millions"of po-mcls^'"scasonally adjusted; months or nonthly average)
June
July
'lay
Jul^
change over
previous quarter
Imports (c,irf,)
bSO
b7b
b30
b5i
- 2
Exports .(f,o*b»)
370
3b8
331
3^0
- 9
13
12
13
12
- 1
-67
-lib
-86
-89
- 7
-19
- 62
. -39
-bO
-11
Re-exports (f,o,b.)
Balance
Trade balance —^
J7 Balance of payments estimate.
Source: Board of Trade,
Table 8. United Kingdom: Reserve Position:
'
(millions of U.S. dollars)
June-August 196b
~
~~
Gold and convertible
currencies
June
July
August
Outstanding
August 31, 196b
-56
-28
- 92
25?b
Drawing rights on I.H.F,
+2
—
n.a.
a/ 2bbl
-£b
-28
n.a,
Total
a7 July 31, 196b.
~
Source: Bank of England and International Monetary Fund.
Apart from the selective intervention policy, reserve losses have
been modest because the overseas sterling area amassed claims in sterling at
a very rapid rate, Over the first six months of 196b these claims increased
by nearly $3bO million or about one-half of Britain's payments deficit for
that period, (See Table 9«)
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Table 9»
~~~~~
- 7 -
United Kingdom; External Liabilities and Claims in Sterling
End of December 1963 and March, June, 19511 "™
(millions of dollars)
Overseas Sterling
area
North America
1963
Dec*
March
6G91
7028
196U
June
Changes
II Q
I Q
196k
196L
722U
+137
+196
305
+ 23
+ 78
Western Europe
1282
121*6.
1198
- 36
- U8
Other
1961
1968
197 k
+
+
10338
101*69
10701
Total
20lt
227
t
7
+131
6
+232
Source: Central Statistical Office, Financial Statistics,
Forward market steady and arbitrage incentives still favor London. .
Despite the weakening position of the pound in the spot market, the forward
rate held steady at about 0 o 65 per cent per annum discount throughout the
month and the covered differential on Treasury bills favored London from 31 to
U2 basis points* This range may be compared with a peak covered differential
on Treasury bills in July of 0»55 per cent per annum in favor of London. At
that time, the Federal Reserve in agreement with British authorities intervened
in the market in order to widen the forward discount and thereby reduce the
arbitrage incentive «•
With respect to other comparable obligations, the yield on Eurodollar deposits exceeded that on New York time certificates of deposit by about
UO basis points s the covered yield on the V T\ ire purchase deposit was about
50 basis points above the yield on U.S. finance paper; and covered local
authority deposit rates exceeded Euro-dollar rates by about 15 basis points,
(See Table 10 and Chart 1,)
Bullion market relatively quiet. The London gold
quiet during August, although demand eased during the first
fixing price fell from $35*081* per fine ounce at the end of
fine ounce on August 21, However, bullion was once more in
last week and the price rose to $35,081. (See Table 11»)
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market was relatively
three weeks and the
July to $35-072 per
demand during the
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Table 10*
U,K0/UeS0 Exchange Rates and Arbitrage Calculations
July-Augusty 1965
August
JjL
31
Exchange ates
Spot (U»Se cents)
Forward (per cent
per annum)
21
28
278.81
278.85
278.75
278.59
278.U3
-.67
-.72
-,67
—#60
-.65
Treasury bills
U.K.
U.S.
Differential
Covered differential
U»5o
3.UU
1.06
*39
U.5o
3.17
1.03
.31
U.50
3.18
1.02
.35
U.5o
3.18
1.02
-.U2
U.50
. 3.U6
l.oU
.39
Euro-4 = Local authority
Euro-#
Local authority covered
Differential
Uc25
U.39
.lk
U.19
U.3U
.15
U.25
U.3U
.09
U.25
U.Uo
.15
U.25
U.35
.10
Lf31
U.25
Uo25
U.25
U.25
3.86
•U5
3.85
*U0
3.86
.39
3.86
#39
3.86
.39
Three month yields
and yield spreads
Euro-S - NoYo certificate
of deposit
" Euro-# a/
NoYo certificate of
deposit jyb/
Differential
a/Previous W e d n e s d a y 0 .
b/ Secondary market, offering rates for negotiable certificates of time deposit.
Table 11a
United Kingdoms
London Fixing Price for Gold: July-August 196U
July
31
Price per fine ounce
(U,S, $)
Sources
Bank of England»
35o08U
™nr
35*081
August
35.079
T T
35^072
w
35r081
A
I N T E R N A T I O N A L M O N E Y M A R K E T Y I E L D S FOR U . S . D O L L A R I N V E S T O R S !
3 - M O N T H E U R O - D O L L A R D E P O S I T V S . C E R T I F I C A T E OF D E P O S I T
YIELDS
U;S. CERTIFICATE OF DEPOSIT,
f,
D I F F E R E N T I A L : EURO D O L L A R O V E R
U . S . C E R T I F I C A T E OF D E P O S I T
,ol
N E W Y O R K OFFER RATES O N SELECTED 3 - M O N T H I N V E S T M E N T S
Friday figures
TREASURY BILLS-;Fully H e d g e d ^
CANADA!
'
W
'U.K.
COMMERCIAL PAPER-Fully Hedged;
(CANADIAN FINANCE COMPANY
U.S. FINANCE COMPANY;
jw —
\0
INTEREST A R B I T R A G E , U N I T E D STATES /
CANADA
Friday figures*
3 - M O N T H TREASURY BILL RATES
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
I.I
1
1
1
RATE D I F F E R E N T I A L W I T t 4 F O R W A R ID EXC: H A N ( GE GCDVER
wvi
1
!
I
!
J
w
V
fU|
NET INCENTIVE IN fAVOIR OF G 4NADA
.1 1 ! 1 1 I I . J .
M
W
S
J_L 1 1
O
M
1961
II
1 1
J
S
1962
1 i
1 1
D
M
1 1
J
1 1
S
1963
11 1i 11
0
M
1 1
J
1964
$
L J
0
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
Pi
3 - M O N T H TREASURY BILL RATES
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
1962
1963
1964
1965.
/
x >
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
1
• ["' 7" T
1
" T " " "™T
1
f
3 - M O N T H 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 T D O T L A R D E P O S I T RATES
I
EURO-DOLIAR LONDON
- V
I
{
1
RATE D I F F E R E N T I A L A N D F O R W A R D D E U T S C H E M A R K
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 INCENTIVE : ;
IN FAVOR OF FRANKFURT ( + ) j
INTERBANK LOAN RATE/
\
A- , , V — V
TREASURY BILLS
A
SHORT-TERM
INTEREST
RATES *
E U R O - D O l l AR - LONDON
1961
^4" H month ir e o IU r v b i l l n i i e i I or all countries e * c o pt Japan
l a n d Switzerland ( 3 month deposit rale)
(A v erage role on bank loons and duco<jnii
1
f:
L O N G - T E R M B O N D YIELDS
P . r cent ,
7
SWITZERLAND
1960
I N D U S T R I A L STOCK INDICES
, 9 s « = ioo
'
Rotlo i t o I » I
SWITZIIUHtrr
—
S
"W"^
X
W
\SWITZIBIAND
-GERMANY
<
v-7>X«.
\rfW^
1 1 1 1 1 1 1 1 I I
1
i
H
I
i
i
i
1 1 1
i
I I
1 1 I I
1 1 1 I I
I I
I I
I
I I
1 1 I I
1
CANADA
iocs
so
1961
'New series. Swiss Bonk Corporation industrial stock index.
^**/iopon: index of 225 industrial and other stocks traded on the Tokyo- exchange.
l b
S P O T 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
P.r
Above
ten
U.Jl. STERLING
Below
par
Above par
Below
J-
,
por
par
3-MONTH
AGAINST
AGAINST
FO R W A R D EX C H A N G E RATE
U.S. DOLLARS
POUND
STERLING - L O N D O N
1
PRE MIUM +
-
-
RANC
< > X ^ X
v
'1%
1 1
1 1
AGAINST POUND
I I
-
T^o
. s . DOLIAI
I I
TARK~~
1 1
DISCCIUNT -
1 1 1 1 1
1 1
1 1
1 1
STERLING - L O N D O N
PREMIUM +
BELGIAN FRANC L
FRENCH FRANC
\A'i
1 1
1 1
@FedFRASER