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Is the storm over for the US economy?

Tue, Sep 23 2008, 13:47 GMT
by Benny Menashe

Finotec Group Inc.

We saw a storm sweep across financial markets last week as stocks moved from one extreme to the other. Last Monday the struggling US investment bank Lehman Brothers filed for bankruptcy and equity prices began spiralling downward. Worldwide panic ensued with billions wiped off the value of stocks. Shares in UK bank HBOS lost over half its value and prompted a merger with Lloyds TSB. However relief was in sight at the end of the week when the US Government announced a proposal with a group of central banks to provide a liquidity injection of $180 billion into world markets, and a decision to mop up so called toxic assets from the balance sheets of US financial companies. In addition, the Financial Services Authority in the UK and the Securities and Exchange Commission in the US imposed a temporary ban on short selling of certain financial shares. In response we saw global stock markets surge last Friday with the FTSE 100 in particular posting its biggest one day gain on record.

Eyes will be on the US meeting this week involving Fed Chairman Bernanke, Treasury Secretary Paulson and SEC Chairman Cox where more perspective will be gleaned on the government takeover of Fannie Mae and Freddie Mac. These three will testify before the Senate Banking, Housing and Urban Affairs Committee regarding last week’s market turmoil and the way forward for the US economy. With US durable goods orders and unemployment claims out later in the week, investors will be looking to see whether there will be upside for the dollar.

In Monday trading there has been downward pressure on the greenback on speculation that the US governments rescue package will not be enough to prevent economic slowdown. ``Even with a plan, the likelihood there will be a very severe slowdown in the U.S. and elsewhere has increased,'' said Simon Derrick, chief currency strategist in London at Bank of New York Mellon Corp. ``I don't think people will return to the same old risk-taking world.'' The USD was down against most of the majors as there was growing sentiment that the Fed’s proposal to buy $700 billion of toxic assets from banks will only worsen the States already swollen budget deficit. If this sentiment continues and the US employment and manufacturing data comes out worse than expected, we could see the dollar continue to weaken. At 8.23am GMT the EUR/USD was trading at $1.4591 and USD/JPY was at 106.00.

Today's Economic Events

Published on  Tue, Sep 23 2008, 13:47 GMT