Heeding “the sound of inevitability”, the US Treasury over the weekend has de facto nationalized Fannie Mae and Freddie Mac, the Government Sponsored Enterprises that play a pivotal role in the US mortgage market. The intervention is aimed at supporting the housing market, with the Treasury directly fostering an improvement in mortgage affordability, and the financial market, which is heavily exposed to the GSEs’ bonds and mortgage backed securities. I expect the market’s reaction will be positive, given the clarity, strength and decisiveness of the measures announced. The plan should help restore recently flagging confidence in the US growth outlook, and it should inject a measure of confidence in the outlook for the financial system at another crucial juncture, ahead of feared quarterly results by major banks. The USD should benefit, and some risk appetite should be restored, to the detriment of JPY and CHF. It should also help shore up sentiment on emerging markets, which has been badly hit in recent days. Market sentiment swings easily and violently in the current climate of uncertainty, and after the gloomy mood of last week we might now get a whiplash of hope. Then the roller-coaster is likely to continue, as uncertainty on the macroeconomic and financial outlook persists and government intervention keeps pace in a piecemeal and targeted way. It is a constant game of brinkmanship, with government intervention triggered only where and when it has finally become essential.
Nerve-wrecking, but so far effective.
