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Global Markets Weekly - 26th January 2009

• Authorities are reacting promptly to renewed financial-sector concerns...
  The defining feature of financial markets over the past two weeks has been the reintensification of concerns about several countries’ financial sectors. The difference between this period of bank turbulence and last September and October (after Lehman Brothers’ failure) is that policy-makers are now showing no hesitation in supporting banks.
• ...to avoid any repeat of the Lehman's fallout. 
  With hindsight, allowing Lehman Brothers to fail led to the effective seizing-up of financial capital markets and required extreme policy counter-measures. The Lehman decision is now seen as a mistake, and several banks in the US, the eurozone and the UK have received government assistance or been fully nationalised in recent weeks.  
• The transferring of risk to the public sector is affecting FX and bond markets...
  Thanks to government support and continued private-sector efforts to raise capital, the gap between global bank write-downs and capital raised has started to close. Explicit government support for the financial sector is an improvement on the post-Lehman environment, but it is no panacea. Risk is transferred to the public sector, so the financial sector risk of different countries is now increasingly reflected in sovereign bond and currency markets, especially for countries with large banking sectors relative to the size of their economy.
• ...but also in the UK.
  The UK banking sector faces similar issues. But, because it’s outside the eurozone, this risk shows up more in lower sterling than in higher borrowing costs. Since the credit crunch began in August 2007, sterling has fallen around 30% against the dollar, versus a 10% depreciation for the euro against the dollar.
• Emerging economies have proved less vulnerable - so far, at least.
  Emerging economies’ banking sectors typically represent a far smaller proportion of GDP. Though usually seen as a sign of economic underdevelopment, this has of late proved more a blessing than a curse. As with the peripheral, indebted nations of the eurozone, however, there is a danger of confusing what is a lagged effect for more sustainable resilience.
• Global trade is being hit hard...
  Trade is the main transmission mechanism to emerging economies from the developed world's slowing growth. The decline in trade flows has accelerated sharply over recent months – a product of both negative demand growth and the commercial reality that trade is a particularly finance-intensive activity. The rapid tightening of credit conditions is reducing trade finance facilities offered by banks, augmenting the real-economy-driven decline.
• ...leading to concerns about increased protectionism...
  For some emerging economies, such as Russia, the effect is felt in the price of its exports. For others, such as China, the decline is volume-led. Either way, the impact on countries’ trade surpluses and companies’ earnings is the same. The new US administration's comments that they consider China a ‘currency manipulator’ – which could have implications for trade agreements – adds unwelcome political risk to an already difficult situation.
• ...and keeping us cautious on riskier assets.
  With financial sector concerns continuing and growing evidence of the slowdown spreading to export-oriented emerging markets, we remain defensively positioned in portfolios.

Indices, Interest rates and Inflation

	Close -23-Jan-08	1 Week%	1 Month%	3 Months%	YTD %
FTSE ALL Share	2,031	-2.4	-4.6	-1.1	-32.8
FTSE 100	4,052	-2.3	-4.8	-0.9	-31.3
S&P 500	832	-2.1	-3.6	-8.4	-38.5
Nasdaq Composite	1,477	-3.4	-2.9	-7.9	-40.5
DJ Stoxx (Europe)	199	-5.5	-8.5	-11.6	-46.3
Nikkei 225	7,745	-5.9	-11.2	-8.5	-42.1
Hang Seng	12,579	-5.1	-11.6	-8.6	-48.3

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	28-Jan
UK (Base rate)	1.50	0.75	0.50	3.1	05-Feb
Euro-zone (Repo Rate)	2.00	2.00	1.75	1.6	05-Feb
Japan (Call rate)	0.10	0.10	0.10	1.0	19-Feb

View the full Global Markets Weekly report (pdf).

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