The US bank plan and better-than-expected data boosted equities.
The current positive sentiment towards equities was assisted last week by a further plan to alleviate the strain on US banks’ balance sheets and by some relatively upbeat data from the US and, to a lesser extent, from other economies.
US housing inventories are falling, which should help prices find a bottom...
Data from the eye of the storm – the US housing market – showed encouraging signs of stabilisation at least, if not recovery. New home sales picked up in February. Although we should avoid reading too much into a single month’s release, housing inventories are now clearly heading down. This is a critical point, as inventory overhang is fuelling the price declines that are devaluing the residential mortgage assets held by banks. There is a long way to go to return to the long-run average of four to five months’ supply, but these trends have been heading in a positive direction since mid-2008.
...as should the US Treasury's latest plan to drive down mortgage rates.
The US Treasury’s latest plan to assist banks by creating public-private partnerships to buy sub-prime and other illiquid mortgage debt securities ultimately aims to lower mortgage rates for borrowers on main street. This would help the price stabilisation process outlined above and, if mortgage rates fell far enough, would drive up refinancing activity, boosting households’ disposable income. Last week, we highlighted 4.5% as a key level at which most of the US residential mortgage market would be refinanceable on a rates basis. According to the Mortgage Bankers’ Association, the average conforming (eligible to be backed by Fannie Mae or Freddie Mac) fixed-rate mortgage deal is currently around 5%.
But less encouraging data came from Germany...
Elsewhere, the economic numbers were less positive .
In Europe, lead indicators of growth are mixed at best. Although PMIs have stabilised over the past two months, other business surveys are not so encouraging. The German IFO survey of manufacturing businesses fell again in March and is now well below its levels in the 1990s and 2001 recessions.
...and Japan, though Asian exports to China may offer a ray of hope. In Japan, exports fell 49% in the year to February, the worst figures on record .
However, one potential source of stabilisation in Asia is exports to China. The Japanese data showed exports to China falling 40% in the year to February. If hardly great news, that’s an improvement on January’s 45% decline. Meanwhile, Taiwanese exports to China are now falling at 26% year on year, a terrible number in absolute terms but well up on January’s drop of 55%.
With markets driven by policy-makers, we await the G20 summit...
Despite these tentative signs of stabilisation in two of the worst affected areas of the real economy – US housing and the international trade of manufactured goods – the financial markets are clearly still taking their lead from policy-makers . The S&P 500’s rally of 7.1% last Monday after the US Treasury announced its latest bank plan was encouraging in price terms but also bore testament to a volatile, inefficient market unable to anticipate even well trailed policy announcements. In this regard, next week’s G20 London summit should be a decisive event for investors as well as politicians. The sharp words and semi-public spats between policy-makers in the run-up to this meeting have not been encouraging, but such diplomatic manoeuvring may prove a poor guide to the summit itself.
...hoping for signs of coordinated action.
Coordinated policy action is still essential to turn this limited stabilisation into a more permanent recovery – and that’s as true for equity prices as for the global economy itself.
Indices, Interest rates and Inflation
| Close -27-Mar-09
|
1 Week%
|
1 Month%
|
3 Months%
|
YTD %
|
|
| FTSE ALL Share
|
1,971
|
1.5
|
2.2
|
-6.6
|
-10.8
|
| FTSE 100
|
3,899
|
1.5
|
1.8
|
-7.5
|
-12.1
|
| S&P 500
|
816
|
6.2
|
11.0
|
-6.5
|
-9.7
|
| Nasdaq Composite
|
1,545
|
6.0
|
12.2
|
1.0
|
-2.0
|
| DJ Stoxx (Europe)
|
195
|
3.1
|
5.7
|
-10.1
|
-12.5
|
| Nikkei 225
|
8,627
|
8.6
|
14.0
|
-1.3
|
-2.6
|
| Hang Seng
|
14,120
|
10.0
|
10.2
|
-0.5
|
-1.9
|
| 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
|
0.2
|
29-Apr
|
| UK (Base rate)
|
0.50
|
0.50
|
0.50
|
3.2
|
02-Apr
|
| Euro-zone (Repo Rate)
|
1.50
|
1.00
|
1.00
|
1.2
|
02-Apr
|
| Japan (Call rate)
|
0.10
|
0.10
|
0.10
|
-0.1
|
7-Apr
|
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