Credit Crunch To Spill Over The World
Despite slew of negative headlines, stock markets around the world still managed to close the week up around 4%. The FTSE and CAC managed 4.7% and 5.4% gains while the Nasdaq 100 was the pick of the US markets, closing the week up 5.2%. The rally was sparked by Lehman Brothers announcing the sale billion of dollars worth of shares late on Monday night.
European financials, such as Deutsche Bank and Barclays led, the bullish charge from the start, ironically helped by the news that UBS would write down CHF 19 Billion. Despite the large sums mentioned, many have interpreted the write down as a sign that the worst of the banking crisis is over. Credit markets marked down the risk of default from UBS after being impressed with the bank’s capital raising efforts. The fact that Lehman’s share sale was significantly over subscribed certainly helped push things higher.
However, markets encountered stiffer headwinds for the rest of the week as more bad news continued to flow around the credit crunch. The Bank Of England Credit Conditions Survey warned that unsecured credit availability is expected to fall somewhat further, and secured credit availability fall even more. Central bankers may have calmed the credit crunch at its source, but the length and depth of the aftershocks are now the biggest danger to domestic economies. With mortgage companies pulling deals almost daily, it may simply be a matter of time before consumers crack.
Ben Bernanke may have subdued the credit crisis (for now) with his dramatic interventions, but the possibility of the crunch spilling over the wider economy remains. He commented that much depends on the rate of decline in US housing values from this point onwards. It is arguable that the same could be said of the wobbling UK and European housing markets. For now though, markets are encouraged by the Feds comments that the US economy will strengthen in the second half of 2008, and grow at or above trend in 2009.
The much-anticipated US payroll report came in not only lower than last month, but even below consensus estimates. This is the third month in a row that the payroll report has not only shown a decline, but has been weaker than consensus estimates. The only other time this happened was spring 2001, which retrospectively, marked the beginning of the last brief US recession. You might expect global equity markets to fall heavily on the news, but they in fact managed to hold to all or most of their gains for the week.
This could be an indicator that bad news is being priced into stock markets at the moment. Central bankers and politicians on both sides of the Atlantic are doing their best to positive in the face of the stream of dismal economic figures, but traders don’t seem fooled. It appears they may already be pricing in a recession in the US and at least a severe contraction in the UK.
This week starts off slowly but quickly builds momentum. With no top line announcements on Monday, Tuesday’s release of the last FOMC meeting minutes, will throw markets from any slumber they may be experiencing prior to this. The general consensus is that US rates have further to go, but an influential Washington think tank has caused many to question the depth of these cuts, saying that the Fed is unlikely to cut below 2%. On Wednesday UK industrial production figures will be released in the morning.
The week reaches a crescendo on Thursday with the release of six top tier economic announcements. First up are UK and European interest rate decisions. A Quarter point cut is ‘odds on’ for the MPC according to some analysts. Still, the ECB is expected to hold their ‘inflation fighting’ stance, and keep rates the same. The ECB president will speak following the release of their decision. At the same time, we receive US Trade balance figures, and US unemployment claims. It will be one hectic lunchtime for European traders. To top off an already packed day, Fed chairman Bernanke is due to speak later in the afternoon.
With a slow start to the week on the economic news front, Traders at BetOnMarkets.com foresee that there’s a reasonable chance that last week’s momentum could spill over to the start of this week. A One Touch trade predicting that the Nasdaq Composite Index will touch 2395 at any time during the next 10 days could yield 15%.
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