Pound slides again as markets enter Bank of England-fuelled 'bubble' stage

Pound slides again as markets enter Bank of England-fuelled 'bubble' stage


The pound slid closer to parity with the euro on Monday, as one of London's leading hedge fund managers warned stock markets are in a Government-fuelled bubble.



By Edmund Conway and Jamie Dunkley

Published: 6:26AM BST 22 Sep 2009





Pound slides closer to parity with euro as it hits a five-month low against the single currency. Photo: CHRISTOPHER PLEDGER "Markets are now entering a bubble phase [which may last] until the end of the year," said Crispin Odey of Odey Asset Management.



However, the bubble is almost entirely dependent on the Bank of England's quantitative easing (QE) policy, through which it is creating £175bn and pumping it into the system by buying Government debt, he added.



Mr Odey's comments came as the pound fell further against other leading currencies after a report from the Bank warned of the effect of the financial crisis on sterling's long-term value.



Mr Odey told clients in a note: "Individuals and institutions are stampeding into real assets – eager to have anything but cash or government bonds... The latter are expensive because of the QE which has caused that bubble.



"At some point the QE will have to come to an end but, until it does, this bull market is sponsored by HMG and everyone should enjoy it."



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Katherine Garrett-Cox, chief executive of Alliance Trust, said: "I think the recent stock market rally has been driven by sentiment rather than fundamental facts.



"In 2008 markets were driven by fear; this year they have been driven by greed.



"I'm sceptical about the market recovery given the fiscal environment we are in. Public spending is falling, consumer spending is down and unemployment will rise."



Although many central banks have taken on a QE policy, the Bank has committed to creating and spending more than any other, arguing that the alternative outcome is severe deflation. However, this is thought to have sparked a gradual exodus from UK investments by overseas asset managers fearful that the policy may generate inflation.



This has pushed the pound lower against most other currencies. The euro hit a five-month high against sterling yesterday before slipping back to 90.58p. Citigroup said yesterday that sterling would drop to parity against the euro in the coming months.



The bank's analyst Michael Hart said: "Tight fiscal policies and easy money is about as negative a policy mix as it is possible to get for the currency and we expect sterling to exceed parity with the euro."

http://www.telegraph.co.uk/finance/economics/6216874/Pound-slides-again-as-markets-enter-Bank-of-England-fuelled-bubble-stage.html