Global Markets Weekly - 16th February 2009
- The US announced a series of policy measures...
Last week saw the fruition of the two main thrusts of economic policy from the new US administration . As well as a compromise fiscal stimulus package being agreed between the two houses of Congress, Treasury Secretary Tim Geithner announced a series of new initiatives, and the extension of some existing ones, aimed at stabilising and recapitalising the banking sector.
- ...but did not produce a clear, conclusive solution to the current problems.
The centrepiece of this announcement was the proposed creation of a public private investment fund to purchase troubled assets from banks and, in so doing, help the price discovery process for all illiquid assets . The markets’ negative response to this policy announcement was twofold. First, there was disappointment that the proposal is a split ownership investment fund, not a fully state-funded ‘bad bank’. Second, it’s unclear which private investors will wish to augment the government funded $500 billion by the intended further $500 billion. Without extremely generous financing and loss guarantees from the government, or some less explicit arm-twisting, an investment fund with the express purpose of purchasing otherwise unsellable securities hardly appears a tempting investment opportunity.
- That failed to dispel the uncertainty lingering over markets...
In other words, the plan remains incomplete. And, in an environment of heightened risk aversion,investors will respond negatively to any policy announcements that add to, rather than reduce, the sum total of uncertainty.
- ...and cast doubt on the new administration's handling of the market.
The US Treasury’s new Financial Stability Plan is likely to prove a large step in the right direction to solving the systemic issues that continue to overhang the US and global banking system. In its dealings with the market, however, the new US administration is learning the lessons of any new parent faced with a volatile and unruly child: the setting of firm boundaries and the clarity of instructions are often as important as the instructions themselves.
- The Bank of England moved closer to quantitative easing.
The Bank of England’s Quarterly Inflation Report saw UK policy-makers too take further strides towards unconventional policy measures . Large downgrades to the Bank’s growth and inflation forecasts led the Bank’s Governor, Mervyn King, to discuss the likely start of quantitative easing, which we have already seen in the US. This was hardly a bolt from the blue. Various speeches and statements have been moving the Bank’s policy, and the political debate about it, in this direction for several weeks. However, the sharp market reaction to King’s comments suggests that the expectation of quantitative easing and an appreciation of its potentially large impact on sterling asset prices were not widely diffused among investors.
- Amid talk that the ECB will follow suit, the euro looks set to weaken.
If this is true for the UK, we suspect it is truer still for the eurozone . After February’s rate announcement, Jean-Claude Trichet, the President of the European Central Bank (ECB), said borrowing costs had not yet reached their lower limit and the ECB ‘did not exclude’quantitative easing. As such measures become more widely discussed by policy-makers and investors, the recent trend towards a narrowing of the eurozone/US interest rate differential and a weaker euro seems likely to continue in the months ahead.
- ...Expectations of widespread quantitative easing are driving the gold rally.
A world in which all major central banks are engaged in some degree of quantitative easing is one of effective competitive devaluation, even if it would be beyond the political pale for policy-makers to acknowledge it openly . This need not be inflationary, but it would help to explain the continued rally in gold.
Indicies Rates and Prices
|
Close -13-Feb-09
|
1 Week%
|
1 Month%
|
3 Months%
|
YTD
%
|
|
FTSE ALL Share
|
2,107
|
-2.1
|
-4.3
|
1.0
|
-4.6
|
|
FTSE 100
|
4,190
|
-2.4
|
-4.8
|
0.5
|
-5.5
|
|
S&P 500
|
827
|
-4.8
|
-5.2
|
-9.3
|
-8.5
|
|
Nasdaq Composite
|
1,534
|
-3.6
|
-0.8
|
-3.9
|
-2.7
|
|
DJ Stoxx (Europe)
|
207
|
-4.1
|
-6.5
|
-7.4
|
-7.0
|
|
Nikkei 225
|
7,779
|
-3.7
|
-7.5
|
-5.6
|
-12.2
|
|
Hang Seng
|
13,555
|
-0.7
|
-0.8
|
2.5
|
-5.8
|
| Official Rates (%) |
Inflation (%)
|
Rate announcement
|
|
Current
|
Mar-09 Forecast
|
Jun-09
Forecast
|
Current
|
Next Date
|
|
US (Fed Funds)
|
0-0.25
|
0-0.25
|
0-0.25
|
0.1
|
17-Mar
|
|
UK (Base rate)
|
1.00
|
0.75
|
0.50
|
3.1
|
05-Mar
|
|
Euro-zone (Repo Rate)
|
2.00
|
2.00
|
1.75
|
1.6
|
05-Mar
|
|
Japan (Call rate)
|
0.10
|
0.10
|
0.10
|
0.4
|
19-Feb
|
Please
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