Equities were weighed down by concerns about the financial sector...
Last week was disappointing for equity markets, with the S&P 500 falling 7%. That weakness was driven by concerns about the health of the financial sector.
Although important and unresolved issues persist about the banking sector – particularly the scale of further bank support from the US government – insurance companies have recently taken the unwelcome spotlight. With worse-than-expected results from some insurance companies and the news that the US authorities were required to inject more capital into nationalised insurer AIG to keep it afloat, insurance was the worst-performing equity sector in the US, Europe and the UK – down around 40% in all regions on the month.
...and particularly the potential write-downs for insurance companies.
Recent news from insurers has served as a reminder that not all troubled assets are held by banks and brokers .
Nouriel Roubini, the New York University professor who was one of the first to publish estimates of asset write-downs, expects around half of the total credit losses from the current downturn to be borne by US banks. This implies further writedowns for insurance companies.
Gilts benefited from the Bank of England's move to quantitative easing...
The Bank of England’s decision to begin quantitative easing (QE), mainly through the purchase of UK government debt (gilts), will be especially welcomed by UK insurance companies, the largest class of gilt holders.
The particular gilts to be purchased by the Bank, defined as ‘medium- and long-dated conventionals [i.e., non-index-linked]’, also favours insurance companies: banks tend to hold shorter-dated gilts for liquidity reasons, while pension funds prefer index-linked gilts for liability-matching reasons.
...and inflation concerns would certainly appear premature at present.
The scale of QE measures announced in the UK is £75 billion over the next three months .
This grows the UK’s monetary base by around 80%. So far, therefore, the policy is slightly smaller than the US’s, which has roughly doubled the monetary base. The figure represents around 4% of broad money (M4) in the UK economy and so is consistent with keeping nominal GDP growing at around this level in the absence of any aggregate credit growth from commercial banks. Concerns that this measure is, by its nature, inflationary are entirely misplaced amid current rapidly tightening lending conditions. Should lending conditions begin to loosen, it would be potentially inflationary not to shrink the monetary base accordingly. However, this would be a conscious political decision at the time and, in its current state, the UK economy is some considerable way from that point.
Gilt yields fell at their fastest rate since 1997.
In the meantime, QE is a clear benefit to holders of gilts and other high-quality sterling-denominated debt . The fall in 10-year gilt yields over recent days has been the fastest since the Bank of England was granted operational independence in May 1997 – the last revolution in UK monetary policy.
If the ECB also adopts QE, euro bonds are likely to see similar gains.
The European Central Bank (ECB) cut rates at their March meeting by 50 basis points to 1.5%, and a further cut to 1% by May seems likely. ECB President Jean-Claude Trichet’s acknowledgement that the bank was studying QE proposals and the sharp downward revision to the bank’s own growth and inflation projections mean that QE remains a strong possibility for the eurozone . The examples of the US and the UK show that the first-round effects of a QE policy regime are currency weakness and bond strength. We see no reason why the eurozone would be fundamentally different in this respect.
Indices, Interest rates and Inflation
|
Close -6-Mar-09 |
1 Week% |
1 Month% |
3 Months% |
YTD |
|
|
FTSE ALL Share |
1,789 |
-7.38 |
-16.9 |
-11.2 |
-32.8 |
|
FTSE 100
|
3,531 |
-7. 8 |
-17.7 |
-12.8 |
-31.3 |
|
S&P 500 |
683 |
-7.0 |
-21.3 |
-22.0 |
-38.5 |
|
Nasdaq Composite |
1,294 |
-6.1 |
-18.7 |
-14.3 |
-40.5 |
|
DJ Stoxx (Europe) |
170 |
-7.7 |
-21.2 |
-17.6 |
-46.3 |
|
Nikkei 225 |
7,173 |
-5.2 |
-11.2 |
-9.4 |
-42.1 |
|
Hang Seng |
11,922 |
-7.0 |
-12.7 |
-19.3 |
-48.3 |
| 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) |
0.50 |
0.50 |
0.50 |
3.0 |
02-Apr |
|
Euro-zone (Repo Rate) |
1.50 |
1.50 |
1.00 |
1.1 |
02-Apr |
|
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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