Nov 3 2008
"Let us hope that the right policy decisions are made, and quickly," Threadneedle chief investment officer Sarah Arkle said in October. This month congress finally approved a $700 billion bail out package, the Troubled Asset Relief Program, to take toxic loans off US bank sheets. In the UK the band aid for banks was somewhat different, recapitalise rather than pay spurious amounts for banks' bad assets.
Inter-banking lending looked like it was easing, JP Morgan saw the interbank rate "thawing out" reducing the spread between banks and official rates. But head of global strategy at Standard Life Andrew Milligan stated: "If the authorities do not act with sufficient speed, the danger would be a further tightening of monetary policy just at the time when recessionary conditions are most affecting consumer and business".
On a personal level in the UK, Tesco announced double the number of applications for savings accounts. The Observer reported in October more people had put faith in a company that sells toilet rolls and carrots than their bank managers. If people and financiers are not convinced on the authorities' strategies, are the people in charge of nations' purse strings doing to right thing?
The outlook is rather bleak for all the staple economies. The Bloomberg measure of global financial conditions has moved to the tightest ever experienced in the 16 year history of the series, reported JP Morgan. Only one of the 21 countries JP Morgan covers reported growth - Indonesia. Meanwhile Threadneedle queried the US bail out, which stuck a heavy burden on the shoulders of every American. Is it simply a veneer to mask underlying unemployment, poor house prices ordinary defaults on top of sub prime debt? Ms Arkle certainly sees some "shock and awe" tactics clouding the facts.
Elsewhere, Spain announced a bail out for assets and South Korea released plans to shore up its construction industry while France announced a rescue deal to save its banks from "foreign predators", reported Barings, as merger and acquisition activity heightened when the value of several banks tumbled on the stock exchange. The outlook for commodities was reduced to neutral by Threadneedle because, despite demand from emerging economies, price fluctuations have not been added in, so it has decided to take caution.
Volatility was a concern of JP Morgan, which flagged up currencies as an area of interest in October in its Weekly Strategy Report. The US has fallen against the Yen, which looks close to its April 1995 high of more than 80 against the greenback. "The sharpest currency declines in countries with the lowest ratio of foreign assets to liabilities, including Brazil, Korea, Mexico and Australia," head of JP Morgan's Global Market Asset Group David Shairp said.
Sterling has been one of the biggest losers. Holiday companies are even latching onto the situation in the UK, recommending cheap breaks outside the Eurozone in Eastern Europe for those that want to escape the crisis. It fell to $1.53 in October with concerns about GDP brought to the fore by JP Morgan, as third quarter growth contracted by 0.5 per cent quarter-on-quarter, taking the year-on-year growth rate to 0.3 per cent from 1.5 per cent. JP Morgan predicted a 0.5 per cent interest rate cut at the next Monetary Policy Committee meeting, adding the spotlight would be on the Fed when it decided how aggressive its manoeuvres would be. JP Morgan discusses the values of zero rate interest.
"If the authorities have done what is necessary to fix the plumbing and that bank's balance sheets will gain transparency and strength over the coming months, then risk assets such as equities look attractive at current valuations," Tom Elliot said in JP Morgan's Guide To The Market. Several reports saw a bounce in equities and a general consensus to be overweight in US and underweight in Europe excluding the UK. There had been scrambling over government bonds as investors sought a safe haven, JP Morgan reported.
One consistent theme remained in world market reports in October - volatility. The lynchpin for this will be the decisions that are made over the coming months as financiers sit back to see if the bail-out measures have worked. Standard Life's head of global strategy Andrew Milligan said: "Governments, especially in the US, have been forced to tear up the rule book in desperate efforts to stabilise some of the most important financial institutions, and prevent a moderate recession in the economy turning into a multiyear event."
It looks like a global first, in terms of this economic crisis. Standard Life notes the International Monetary Fund's report of 40 years of banking crises. The blueprint appears to be socialising the public sector's bad debt, lowering interest rates for a liquidity injection and bank recapitalisation. The question is whether the bail-out packages have done that. Former chancellor Gordon Brown appears to be taking the lead, but as Threadneedle questions, is he flash enough to make things happen? The result of the UK election could certainly be riding on this and it would be prudent to keep an eye on the results of the US ballot. With US GDP data released days before the election, will this prove the political weapon for the Democrats?
Recession looks likely for all 30 of the Organisation for Economic Co-operation and Development countries, the international organisation which helps governments tackle the economic, social and governance challenges of a globalised economy, Standard Life said. Indeed Threadneedle revised its GDP for the US down, it reported. Every report foresees gloom in the coming months, with Standard Life seeing muted recovery in 2010. With debt now estimated to run at more than £200 for every person in the world, according to a report in the Metro, let's hope the decisions are the right ones.
