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Weekly Market Commentary

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The man in the street ‘got it': the credit crunch hit home and is here to stay

Mon, Oct 13 2008, 12:43 GMT
by Nicole Elliott

Mizuho Corporate Bank

weekly market commentary will be away until friday 24th october

Overview

Where to start? One of the most hectic, scary, dramatic weeks in financial markets post WWII where its global nature meant that nothing and nowhere was immune. In order to calm things down Brazil, Iceland, Indonesia and Russia temporarily closed their stock exchanges –only to find fixed income markets trashed instead. Most Asian, European and US indices are down about 20% so far this month and 40% since January. With more banks collapsing many sought refuge in short-dated Treasuries, whose yield is now a fraction of what one has to pay for cash in the interbank market (money which is currently only available for a week or less). As many banks have nothing to lend, needy corporates have nowhere to go, bond and rights issues are cancelled, credit lines drawn down and ‘good’ assets sold to raise cash. Other banks are nationalised and some are declared insolvent, again causing a rush to raise cash to stave off bankruptcy elsewhere, and so the spiral gathers force and extends its scope. Central bankers, belatedly realising that they are overseeing the biggest financial failure in history, decided a concerted effort to cut interest rates was the solution: so Britain, Canada, China, the Eurozone, Hong Kong, India, South Korea, Sweden, Switzerland and the US cut by 50 basis points (some a bit more, others a bit less, and maybe others that we have forgotten in among the eager rush to take part in ‘the solution’), as politicians thump chests saying ‘there is no plan B’. And still stock markets fell some more, the interbank’s lack of trust did not improve (even in the UK where a £500B detailed rescue package was announced), and the economic outlook got a lot bleaker. The US dollar gained against everything except the Yen, some emerging market currencies losing 20% in October, and AUD/JPY (the world’s favourite ‘carry trade’) –57% in the last three months.

Political and Economic Developments

Slowly, one by one, countries are planning to set up funds to ‘protect’ their banking industries. The public correctly feels that bankers need protecting from their unbridled greed and the industry is now universally derided. Taxpayers are loath to pay for bail outs but realise that the economy cannot function without money flowing freely. The authorities still have, at best, a patchy understanding of the immediate issues and cannot be trusted to do a ‘good job’: witness Gordon Brown’s handling of British deposits in Icelandic banks. As for the long term ramifications politicians will lie, grab votes, and hang the consequences.
UK HBOS House Prices dropped 1.3% last month, 12.4% over the year, the sharpest decline in at least 25 years.
Japanese Bankruptcies increased 34.4% in September, the biggest jump since 1999 and close to the highest in the last twenty years (when the asset bubble burst).

Underlying Themes

The man in the street ‘got it’: the credit crunch hit home and is here to stay. People are understandably worried, not just about their investments but about prospects going forward. Plans put on ice or shelved all-together, dreams shattered and as always the most vulnerable hardest hit. Baby boomers never had it so bad and are ill-prepared to deal with the fall-out. Nevertheless man being an optimist still believes there is a ‘Deus ex machina’, a supreme being/machine that descends from the sky and finds a solution to intractable problems.

What to watch for next week

Monday 13th October there are holidays in Israel, Japan and Canada, which holds Parliamentary elections the next day. We get UK September PPI and the IMF, which thinks US and European banks must shrink their balance sheets by $10,000B over five years, and World Bank hold their annual meeting in Washington. Tuesday September BRC Retail Sales, RICS House Price Balance, Japan Domestic CGPI, Consumer Confidence, UK CPI, EZ15 and German October ZEWs, and US Monthly Budget Statement. Wednesday Japan August Trade Balance, September Tokyo Condominium Sales, EZ15 CPI, UK Unemployment and August Average Earnings. Then US August Business Inventories, September PPI, Retail Sales, October Empire Manufacturing Survey and the Fed’s Beige Book. The Norges Bank has brought forward an interest rate setting meeting. Thursday US August Net TIC Flows, September CPI, Industrial Production, October PhiladelphiaFed Survey and NAHB Housing Market Index. Friday Japan August Tertiary Industry Index, September Tokyo and Nationwide Department Store Sales, EZ15 August Trade Balance, September Housing Starts and October University of Michigan Confidence Survey.

Positioning and Technical Analysis

Dysfunctional and irrational markets will continue until month-end at the very least as the need to raise cash and prop up edifices intensifies. Some will have to dump valuable assets at rock-bottom prices so the canny investor must keep his eyes and ears open for once-in-a-lifetime opportunities. Current financial chaos will have ever more immediate effects closer to home. These will very from nation to nation but the overall effect is that running any business will become terribly difficult, and possibly come to a complete standstill. Watch the insurers especially closely.

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Published on  Mon, Oct 13 2008, 12:50 GMT