Further policy actions were unveiled last week...
Last week, policy-makers on both sides of the Atlantic extended their efforts to stabilise and recapitalise the banking system, to prevent further dislocation and to kickstart the credit multiplier that is currently operating in reverse in most developed economies as lending standards have tightened rapidly.
...notably the UK's bank insurance scheme...
The UK government announced the details of its Asset Protection Scheme, through which losses above a certain level on nominated assets are borne by the government in return for an insurance premium. It seems likely to be taken up by at least the two banks in which the government already has a substantial share, RBS and Lloyds Banking Group.
...while the Bank of England is still considering quantitative easing.
So far, the UK authorities have not taken the US route of outright asset purchases. Speaking to Parliament during the week, however, the Governor of the Bank of England, Mervyn King, indicated that he had only technical objections to such a scheme. He warned that there was a risk of the government funding assets ‘without knowing their value’, so the Bank should ‘take the time to do forensic analysis.’
The US Treasury's stress test for banks appears a thoughtful measure.
In the US, the authorities will conduct a series of stress tests focused on the 19 largest banks to assess the extent to which they require additional capital. On the completion of these stress tests (due by the end of April), the banks will be offered new capital from the Treasury equal to 1-2% of assets, in the form of new convertible shares yielding 9%. This looks a proactive and thoughtful response by the US Treasury, although the stress tests’ parameters are not especially severe. The assumed rise in unemployment (the main determinant of future default rates) to 10.5% by 2010 seems more an acceptance of current economic reality than a forecast of any additional deterioration.
However, economic data worsened last week...
Meanwhile, the fall in US house prices – the epicentre of the current crisis – has accelerated over recent months, after earlier signs of stabilisation. This is probably the second-round effect of rising unemployment on the housing market. A similar pattern is also evident in the UK, though at an earlier stage. Consumer confidence figures are another obvious victim of the worsening labour market, and their decline to all-time lows suggests a further worsening of consumer spending in the first quarter of 2009.
...which might herald an end to the recent slight improvement.
More generally, all US economic numbers surprised increasingly to the downside last week, suggesting that the recent trend of data being ‘less bad’ may be coming to end. The US has led changes in global economic sentiment during the crisis, and we expect this to continue in the weeks ahead. While doing little to alter the economic reality markets face, these oscillations in economic surprises have a powerful impact on asset prices. In particular, the ‘less bad’ surprises of recent weeks have weakened the yen, pointing to a slowdown in the repatriation of portfolio investments.
No quick ending to the current recession is in sight.
The policy measures of the past year and the controversy about any fresh action – particularly the further capitalisation or nationalisation of some US banks – show that there will be no quick fix to this balance-sheet recession. In the meantime, ‘less bad’ is the new good. In this environment, powerful bear market rallies are possible, but something more substantial is needed for a permanent recovery in equity prices.
Indices, Interest rates and Inflation
|
Close -27-Feb-09 |
1 Week% |
1 Month% |
3 Months% |
YTD |
|
|
FTSE ALL Share |
1,930 |
-1.3 |
-8.1 |
-8.3 |
-12.7 |
|
FTSE 100 |
3,830 |
-1.5 |
-8.7 |
-9.4 |
-13.6 |
|
S&P 500 |
735 |
-4.5 |
-13.1 |
-17.2 |
-18.6 |
|
Nasdaq Composite |
1,378 |
-4.4 |
-8.4 |
-10.1 |
-12.6 |
|
DJ Stoxx (Europe) |
184 |
-2.1 |
-10.3 |
17.0 |
-17.3 |
|
Nikkei 225 |
7,568 |
2.1 |
-6.1 |
-9.6 |
-14.6 |
|
Hang Seng |
12,812 |
0.9 |
1.9 |
-5.5 |
-11.0 |
| Official Rates (%) |
Inflation (%) |
Rate announcement |
|||
|
Current |
Mar-09 Forecast |
Jun-09 |
Current |
Next Date |
|
|
US (Fed Funds) |
0 - 0.25 |
0 - 0.25 |
0 - 0.25 |
0.00 |
17-Mar |
|
UK (Base rate) |
1.00 |
0.50 |
0.50 |
3.0 |
05-Mar |
|
Euro-zone (Repo Rate) |
2.00 |
1.50 |
1.50 |
1.1 |
05-Mar |
|
Japan (Call rate) |
0.10 |
0.10 |
0.10 |
0.0 |
17-Mar |
View the full Global Markets Weekly report (pdf).
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