Last week, Ping An, Chinas second-largest insurer, took a 4.2% (USD 2.7bn) stake in Dutch-Belgian Financial Ser-vices company Fortis, and Citigroup got a USD 7.5bn capi-tal infusion from the sovereign-wealth fund of Abu Dhabi in the United Emirates. These two deals are interesting in light of the current financial crisis and the increased de-mand for liquidity. The global banking sector will have to absorb sizeable losses related to US sub-prime bonds and the key words here are `de-leveraging´ and `balance sheet expansion´. Worries about a classic credit crunch have been an important driver of the decline in equity prices and bond yields over the past two months.
The fact that Asian money has started to flow to the Western banking sector represents a confidence boost. In a way it is ironic that Asian liquidity comes to the rescue of the Western banking sector. The massive build-up of reserves in Asia lies behind the search-for-yield and excessive risk-taking which eventually trig-gered the current crisis. The investment flow from Asia, highlighted by the two deals announced last week, is also showing up in official figures. The difference be-tween the grey bars and the blue line in the chart to the right in the middle is a rough measure of the invest-ment outflow from China. Official data confirm that Chi-nese liquidity is flowing into global financial markets at the time of a funding drought.
Backed up by the liquidity flow from Asia, we continue to believe that equity markets could stage a rally up to year-end. US macro data are not expected to confirm recession worries, and a Fed easing at the December meeting should provide some comfort to markets. Our main scenario is for equity markets and bond yields to increase up to year-end.
The fact that Asian money has started to flow to the Western banking sector represents a confidence boost. In a way it is ironic that Asian liquidity comes to the rescue of the Western banking sector. The massive build-up of reserves in Asia lies behind the search-for-yield and excessive risk-taking which eventually trig-gered the current crisis. The investment flow from Asia, highlighted by the two deals announced last week, is also showing up in official figures. The difference be-tween the grey bars and the blue line in the chart to the right in the middle is a rough measure of the invest-ment outflow from China. Official data confirm that Chi-nese liquidity is flowing into global financial markets at the time of a funding drought.
Backed up by the liquidity flow from Asia, we continue to believe that equity markets could stage a rally up to year-end. US macro data are not expected to confirm recession worries, and a Fed easing at the December meeting should provide some comfort to markets. Our main scenario is for equity markets and bond yields to increase up to year-end.
