Turmoil on the financial markets has flared up once again. While the crisis is still primarily a credit crisis, the financial markets have growing fears that it can have se-rious consequences for growth in the US and perhaps even globally. The recent tumble on equity markets has not only hit financials cyclical equities in general are be-ing increasingly hurt.
Generally speaking, the market overall continues to be-lieve that the global economy will pull through the crisis more or less unscathed, although growth in the US may be hit hard. Faith in this de-coupling of the US from the rest of the world is an important reason why the dollar is under pressure and why many commodities are continu-ing to soar. Faith in the de-coupling has, however, become more fragile. The Bank of England will probably feel forced to cut interest rates as early as December, and the mar-ket now is also of the opinion that the ECB will cut in 2008.
The market is currently pricing in US rate cuts of more than one percentage point, which is close to shouting recession. However, in our view, this perception of the state of play is overly pessimistic, even though it looks increasingly likely that the Fed will cut rates in Decem-ber. We see equities as oversold and bonds as over-bought and are looking for a correction in the market. That said, we acknowledge that it will be the credit markets that will point the way for the financial mar-kets. As the year draws to a close there will be event risk aplenty and new tensions in the money market as demand for liquidity is traditionally high around the turn of the year.
Generally speaking, the market overall continues to be-lieve that the global economy will pull through the crisis more or less unscathed, although growth in the US may be hit hard. Faith in this de-coupling of the US from the rest of the world is an important reason why the dollar is under pressure and why many commodities are continu-ing to soar. Faith in the de-coupling has, however, become more fragile. The Bank of England will probably feel forced to cut interest rates as early as December, and the mar-ket now is also of the opinion that the ECB will cut in 2008.
The market is currently pricing in US rate cuts of more than one percentage point, which is close to shouting recession. However, in our view, this perception of the state of play is overly pessimistic, even though it looks increasingly likely that the Fed will cut rates in Decem-ber. We see equities as oversold and bonds as over-bought and are looking for a correction in the market. That said, we acknowledge that it will be the credit markets that will point the way for the financial mar-kets. As the year draws to a close there will be event risk aplenty and new tensions in the money market as demand for liquidity is traditionally high around the turn of the year.
