Oct 2 2008
September was a dramatic month for world markets. The US investment bank, Lehman Brothers, announced that it would seek protection from creditors under US bankruptcy laws while another investment bank, Merrill Lynch, revealed it was in the advanced stages of a takeover by the Bank of America.
Leading insurer American International Group (AIG) fell foul of adverse economic conditions, borrowing $80 billion from the US government as a bridging loan, Barings Weekly reported.
Question marks over Morgan Stanley and Goldman Sachs were founded when US authorities agreed to change their status from investment bank, to facilitate deposits like commercial structures.
In the UK, chancellor Alistair Darling said the economy was facing its worst crisis in 60 years. As Rathbones' chief investment officer Julian Chillingworth said in the company's Economic Market Review, "whether the UK is in recessionary territory is now a moot point".
Strategist David Shairp in JPMorgan Weekly Strategy Report, said there were two factors that would determine the exit from a banking crisis: parties benefiting from risk taking should help bear the brunt and political will was necessary to make restructuring a priority.
He said: "Willingness to grasp the nettle of capital losses and to promote speedy price and economic adjustment is key, as is preparedness to embrace unconventional policy measures."
Unconventional policy was apparent in the sidelines of the proposed HBOS takeover by Lloyds TSB in the UK, which would create a banking unit, holding close to one-third of the UK's savings and mortgage market.
This sort of deal would be blocked on anti-trust grounds, Barings Weekly, reported. However, HBOS communications manager Shane O'Riordain told the BBC: "We've seen unprecedented developments in the last few weeks. In our judgement, the regulators have acted decisively right through that period."
Resolution?
The US government has grasped the veritable bull by both horns and may well be, as commentators have speculated, "first in, first out" of the financial crisis. But plans hit a wall on Monday when congress threw-out a US$700 billion rescue package to take toxic and illiquid assets off the balance sheets of financial institutions.
Presidential candidates Barack Obama and John McCain were both ushered into emergency talks on the state of the country's finances by president Bush, according to the Financial Times, with McCain famously announcing he was putting campaigning on hold until the matter was resolved.
The US Federal Bank also announced plans for US$180 billion of credit for other central banks, the equivalent of the GDP of Malaysia. The rescues managed to angered some politicians who criticised a second increase in the US debt ceiling this year, which would take the country US$11,300 billion into the red.
In the UK this kind of cash flow has not been made available. As chief investment officer for Threadneedle, Sarah Arkle said: "The trouble is the UK has not had a US fiscal-style stimulus package and cannot even afford one."
Despite the Bank of England's announcement of an extended special liquidity scheme, Threadneedle and JP Morgan revised down earnings estimates for the UK for 2009. JPMorgan Global Monthly Asset Group's monthly investment outlook forecast real GDP figures in the UK down by half in 2009 to 0.6 from 1.2.
Meanwhile the crisis was spreading through emerging markets. China saw its sovereign wealth body tighten lending while buying listed stocks in national banks, according to Barings Weekly report.
The country was expected to weather a slowdown in exports with demand from its domestic market. However, at the end of the month European leaders had criticised this "closed doors" approach to foreign investment and "patriotic" economy, reported the Financial Times.
Japan faced a slowdown in exports to the US and Europe too, while facing the worst crisis in consumer confidence in 26 years, according to Barings Weekly report. Standard Life was eying Sumitomo Mitsui bank, which was growing overseas lending by 40 per cent as well as Toyota due to strong expected sales in Africa and Russia. The east European super power, still facing woe from its invasion of Georgia, increased its deposits in state-owned banks by US$50 billion following the failure of KIT, a brokerage.
Investment
US equities were mentioned by most industry analysts as government bonds continued to decline in most of the major markets. Weaker energy prices, down 25 to 30 per cent from July, signalled a good start to 2009, forecast JP Morgan. Commodities were down 18 per cent over two months. It reduced investment in UK equities to neutral from overweight and reported "cyclical risks" remaining for emerging markets. In a Market Review and Themes for September, analysts recommended gold as a traditional hedge against inflation.
"The rescue of Fannie Mae and Freddie Mac reduced fears of a systematic banking crisis and so may contribute in bringing down commercial borrowing rates relative to policy rates," JP Morgan added.
Rathbones also recommended US equities, while Threadneedle said US dollars were looking healthy, posting better against Sterling and the Euro, which has had major downturns in the zone. A leading German financial authority posted a three-year low in the economy while Spanish industrial production fell ten per cent year-on-year.
Is it the end?
Just when everything looked like it was picking up in the US, financial security went into turmoil at the end of September when Congress rejected plans to buy bad debts. Commentators say it will not be until the November elections that we know what the future holds as far as "first in first out" for the US is concerned. In the UK, "the odds are in favour of a recession" said Threadneedle with slowdowns predicted for all the major markets of the world. Next month we will see what support, if any, will come from the US government and whether there will be any crutch from those benefiting from the volatile markets.
