Weekly Focus
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Fears of financial meltdown
Fri, Sep 5 2008, 14:39 GMT
by Danske Research Team
Financial turmoil rocked the markets once again this week as a very negative cocktail of bad financial news and weak economic data put pressure on risky assets.
On the financial front several stories are weighing on sentiment. First, there is a lot of uncertainty over a large amount of funding that banks need to roll soon. Floating rate notes that were issued by banks in 2006 to borrow money will come due over the next year and a large chunk of that will expire over the next month when USD 95bn matures. Adding to uncertainties over funding in Europe was a tightening of collateral rules from the ECB aimed at stopping abuse of the collateral system by banks. Second, the problems facing the US mortgage giants Fannie Mae and Freddie Mac remain unresolved. The so-called GSEs (government-sponsored entities) need new capital due to losses on their portfo-lio of mortgages but private investors have been very reluctant to provide the necessary capital. The mar-kets are now waiting for the US Treasury to intervene with a plan by which they will put government capital into the GSEs. The markets have waited for a while, though, and are losing patience. Over the week news that Chinese banks are selling Fannie and Freddie bonds have added to the pressure on the GSEs. A third factor pushing down risky assets is more stories of hedge funds in difficulty that need to liquidate assets. This was because stocks widely held by hedge funds have fallen more severely than the broader market over the past week.
On the macro front, weak data on US retail sales and unemployment added to a picture of an economy that is facing strong headwinds in the second half. Second quarter growth recovered but mainly due to strong ex-ports and the boost to consumption from the tax cut. With global growth weakening and the tax boost re-versing the talk of US recession is resurfacing.
Published on Fri, Sep 5 2008, 14:42 GMT
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