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Financial crisis update

Fri, Oct 24 2008, 07:51 GMT
by Peter Possing Andersen, Lars Rasmussen

Danske Bank A/S

The aim of this publication is to provide an overview of current stories/issues in relation to the financial market crisis. We update this publication regularly. The previous Financial Crisis Update was published on September 26, 2008.

• The financial crisis is changing its nature at the moment, away from fear of systemic risk attached to money and credit markets and toward emerging markets and the economic consequences of the financial crisis.

• Money markets are very far from functioning properly, but the worst is probably over following a series of initiatives from governments and central banks worldwide. Getting money markets to function normally again is probably key longer term. Banks look able to raise capital following government guarantees easing the fear of a full-blown credit crunch.

• The crisis has spread to global currency and equity markets as risk aversion is fuelling further deleveraging and forced selling. Global stock markets are down almost 50% from the in peak last autumn.

• Emerging markets have been severely hit recently and more is probably in the pipeline. Unwinding of carry and dwindling risk appetite is hitting the most imbalanced markets - these markets include CEE, Russia, the Ukraine, Turkey and South Africa.

• The economic fallout from the crisis is increasing and the economic outlook appears dire. A global recession is on the cards. We have the bulk of real economic losses (rather than the marked-to-market losses that have dominated so far) ahead of us as unemployment and delinquencies continue to climb higher.

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Published on  Fri, Oct 24 2008, 07:51 GMT

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Financial crisis update

Fri, Sep 26 2008, 07:06 GMT
by Danske Research Team

Danske Bank A/S

This publication provides an overview of current stories/issues in relation to the financial market crisis. We update this publication regularly. The previous Financial Crisis Update was published on September 3, 2008.

• The financial crisis just keeps escalating: Since we last published Financial Crisis Update on 3 September, Lehman Brothers has filed for Chapter 11, Bank of America has bought Merrill Lynch, Fannie Mae and Freddie Mac have de facto been nationalised, AIG has been rescued by the Fed, leading central banks around the globe have provided extra USD funding in a coordinated attempt to help money markets, and last but certainly not least, the US Treasury has proposed using USD 700bn to buy troubled mortgage assets.
• Key for the short term is the passing of the USD 700bn bailout package in the US Congress. If the bailout legislation passes it will provide some relief, but it is far from certain that it will solve all the problems. Getting money markets to function normally again is probably key longer term.
• Credits have had a rough time and are far from out of the woods yet. A slowing global economy, rapidly tightening lending standards and ongoing deleveraging will continue to weigh on credits for some time to come. In terms of valuation, much is already discounted in spreads, but we fail to see any significant relief in the credit market for the remainder of 2008. A stabilisation of money markets is a precondition for credit markets to stabilize again.
  
• While new losses from financial institutions continue to be revealed, they have been on a smaller scale than earlier. However, as Lehman has demonstrated, raising capital can be very difficult. Further losses and funding pressures remain in focus. If banks can raise capital (like Goldman Sachs), it is positive. But depressed share prices will make this difficult.
  
• Lending standards continue to be tightened in both Europe and the US, underlining the overall picture of tightening credit availability globally. Along with pressure from high commodity prices and declining asset prices, this is likely to feed the deleveraging of the global financial system further.

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Published on  Fri, Sep 26 2008, 07:06 GMT

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Financial crisis update

Wed, Sep 3 2008, 16:51 GMT
by Danske Research Team

Danske Bank A/S

• The financial crisis just will not go away. Since we last published Financial Crisis Update, jitters have remained on financial markets and risk appetite has been scaled down. Problems in the money markets remain unresolved. Credit spreads have generally widened and financial equities have been close to their mid-July lows. The need for recapitalisation in the government sponsored agencies, Freddie Mac and Fannie Mae - the largest providers of prime mortgage loans to the US mortgage market - remains at the forefront of things.

• While technical movements and forced selling set the agenda at the beginning of the crisis, focus is now turning to the consequences for - and the state of - the real economy. So far this is not a pretty sight and for the moment we fail to see any room for substantial tightening of credit spreads despite the current high levels.

• Credits have had a rough time and are not out of the woods yet. A slowing global economy, rapidly tightening lending standards and ongoing deleveraging will continue to weigh on credits for some time to come. In terms of valuation, much is already discounted in spreads but we fail to see any significant relief in the credit market for the remainder of 2008. Consequently, we believe spreads will remain at current levels or drift slightly wider, driven by the unfavourable technical situation in the market.

• While new losses from financial institution continue to arrive it has been on a much smaller scale than earlier. Bloomberg currently report USD511.3bn in losses from financial institutions worldwide. Recapitalisation has continued and Bloomberg reports USD321.6bn in capital raised at the moment. Nevertheless, potential losses might be much bigger when compared with the standing IMF estimate of mortgage-related losses of in total USD1 trillion. Great uncertainty regarding the size of future losses prevails. However, it remains very likely that more bad news is in the pipeline. Hence the risk of negative surprises going forward remains high.

• Lending standards continue to be tightened in both Europe and the US, underlining the overall picture of tightening credit availability globally. Along with pressure from high commodity prices and declining assets prices, this is likely to feed the deleveraging of the global financial system further.

• Lending standards continue to be tightened in both Europe and the US, underlining the overall picture of tightening credit availability globally. Along with pressure from high commodity prices and declining assets prices, this is likely to feed the deleveraging of the global financial system further.

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Published on  Wed, Sep 3 2008, 16:51 GMT

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Global: Inflation expectations monitor

Wed, Sep 3 2008, 08:35 GMT
by Signe Roed-Frederiksen

Danske Bank A/S

• • Consumer short- and long-term inflation expectations have in general broken the increasing trend. UK short-term and Norway long-term expectations are the only ones to rise recently. If sustained this is comforting news for the central banks.

• • Forecaster inflation expectations generally remain stable across the surveyed countries. The only exception is Sweden, where the Prospera five-year inflation forecast continues to increase. 

• • Market implied long-term inflation expectations have also declined. Only the UK has risen recently but that was on the back of a sharp decline. France, the UK and Sweden appear to have reversed the sharp increases they previously experienced. US expectations have moved sideways.

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Published on  Wed, Sep 3 2008, 08:35 GMT

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USA: Preview on August's ISM

Mon, Sep 1 2008, 11:36 GMT
by Peter Possing Andersen, Signe Roed-Frederiksen

Danske Bank A/S

• • July's ISM index fell back to 50.0 following the surprise increase to 50.2 in June. New orders dropped to 45.0 from June's 49.6 and the inventory index declined to 45.0 from 51.2, suggesting the inventory adjustment is still ongoing. 

• • Indications from the regional indexes have been mixed this month, but overall the local indexes suggest a reading of 49.6. 

• • We expect ISM to stay unchanged at 50.0 in August, in line with consensus expectations. Watch new export orders for signs of weakness starting in this part of the economy. 

• • Over the next three months we expect weakening domestic demand to weigh on the ISM index. However, we do not expect a sharp deterioration as the run-down in inventories has been faster and earlier than we usually see in times of fading demand. On a six-month horizon we expect the ISM index to move above 50 as economic growth starts to pick up.

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Published on  Mon, Sep 1 2008, 11:36 GMT

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USA: Preview of July's ISM

Fri, Aug 1 2008, 08:58 GMT
by Peter Possing Andersen

Danske Bank A/S

• • June's ISM figure surprised by rising to 50.2 from 49.2 in May. The increase was mainly driven by the "bad" sub-indices, namely inventories and supplier deliveries. The increase in the inventories index could be a sign of stalling demand, while high readings in the supplier deliveries index are usually a sign of underlying inflation pressures. 

• • We have expanded our coverage of the local indices to include the PMIs from Cincinnati and Mil-waukee. The local indices have been very mixed this month, and overall indicate an ISM reading of 48.5

• • We expect an ISM reading of 48.5, which is below the consensus forecast of 49.0, but once again higher than our one-month model's forecast. We expect the price index to remain high at 90.

• • Going forward, we still expect to see sub-par readings in the ISM over the coming quarters, mainly due to weakening domestic demand in H2. However, unusually low inventories will probably prevent the ISM dropping as low as forecast by some of our models.

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Published on  Fri, Aug 1 2008, 08:58 GMT

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Global: Inflation expectations monitor

Tue, Jul 29 2008, 10:57 GMT
by Peter Possing Andersen

Danske Bank A/S

Credibility of monetary anchoring is vital to central banks. One important indicator of credibility is inflation expectations. Current elevated headline inflation has made the monitoring of expectations even more important. This monthly monitor tracks developments in the most recognised measures of inflation expectations in the US, Euroland, the UK, Norway and Sweden.

• • Consumer short-term inflation expectations have continued to trend higher in most of Europe, whereas they are unchanged in the US. The important long-term inflation expectation indicators have declined in the US and the UK.
  
• • Forecaster's inflation expectations generally remain relatively stable across the surveyed countries. The only exception is Sweden, where the Prospera five-year inflation forecast continues to move higher.
  
• • Market implied long-term inflation expectations still indicate an upward trend, but in the UK and Sweden expectations have rebounded somewhat in recent weeks.

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Published on  Tue, Jul 29 2008, 10:57 GMT

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Financial crisis update

Fri, Jul 11 2008, 09:32 GMT
by Peter Possing Andersen

Danske Bank A/S

The aim of this publication is to provide an overview of current stories/issues in relation to the financial market crisis. We update this publication regularly. The previous Financial Crisis Update was published on May 21, 2008

•  Since we last published Financial Crisis Update, jitters have returned to financial markets and risk appetite has been scaled down. Problems in the money markets remain unsolved, but have generally not worsened. Credit spreads have generally widened and financial equities have seen new cyclical lows. Most recently the jitters have centred on a further need for recapitalisation in the government sponsored agencies, Freddie Mac and Fannie Mae - the largest providers of prime mortgage loans to the US mortgage market.
  
  
•  While technical movements and forced selling set the agenda in the beginning of the crisis, focus is now turning to the consequences for - and the state of - the real economy. So far this is not a pretty sight and for the moment we fail to see any room for substantial tightening of credit spreads despite the current high levels.
  
  
•  While new losses from financial institution continue to arrive it has been on a much smaller scale in Q2 than was the case in Q1 and Q4. Bloomberg currently report USD403.5bn in losses from financial institutions worldwide. Over the course of Q2 recapitalisation has continued. Bloomberg reports USD320.1bn in capital raised, of which USD171.9bn came in Q2. Still potential losses might be much bigger when compared with the standing IMF estimate of mortgage-related losses of in total USD1 trillion. Great uncertainty regarding the size of future losses prevails. However, it remains very likely that more bad news is in the pipeline. Hence the risk of negative surprises going forward remains high.
  
  
•  Lending standards continue to be tightened in both Europe and the US, underlining the overall picture of tightening credit availability globally. Along with pressure from high commodity prices and declining assets prices, this is likely to feed the deleveraging of the global financial system further.

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Published on  Fri, Jul 11 2008, 09:32 GMT

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USA: Preview on June'’s ISM

Tue, Jul 1 2008, 08:30 GMT
by Peter Possing Andersen

Danske Bank A/S

• • May's ISM rose to 49.6 from 48.6 in April. The increase was mainly driven by the production index and the new orders index, and can mainly be explained by strong external demand and very lean inventories.
  

• • All local indices have shown a declining trend this month, especially Richmond. When looking into the details we find that all local indices have shown declines in the Production and New Orders subcomponents, and only Empire and Chicago showed an increase in Employment. This reduces the overall signal from the local indices – which are pointing to an ISM level of 47.9, down from 49.4. When looking at the price indices, the local indices indicate an increase of 3.4 index points.

• • Tomorrow we expect an ISM reading of 48.0 for June, which is below the consensus forecast of 48.6 but once again higher than our one-month model forecast. We still expect the ISM to weaken in the coming months due to weakening domestic demand. However, the downside – compared to our model – may be limited due to dynamic effects from the tax rebates, which have had an early impact on consumer demand.

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Published on  Tue, Jul 1 2008, 08:30 GMT

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Global: Inflation expectations monitor

Fri, Jun 20 2008, 09:57 GMT
by Peter Possing Andersen

Danske Bank A/S

• • Consumer’s short- and long-term inflation expectations have continued to trend higher in most countries over the recent months. Particularly the upward move in consumers’ long-term inflation gauge is of importance for the central banks.
  

• • Forecaster’s inflation expectations generally remain relatively stable across the surveyed countries. The only exception is Sweden, where the Prospera five-year inflation forecast continues to move higher.
  

• • Market-implied long-term inflation expectations have been increasing over the past few months. France and the UK show the highest reading for the year, while the US and the Swedish market have not yet moved above recent highs.

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Published on  Fri, Jun 20 2008, 09:57 GMT