Another dramatic weekend saw four banks receive government bail outs, not to
mention the further file sales and mergers. Mondays have been chaos for the
last few weeks, as governments on both sides of the pond prefer to work
through major announcements, mergers, and bailouts, over the relative calm of
the weekend. Although Bradford and Bingley grabbed the headlines in the UK,
governments in Belgium, the Netherlands, and Luxemburg had to throw billions
at Fortis, while Germany guaranteed loans to Hypo Real Estate. In the US,
investors waved goodbye to Wachovio as a takeover by Wells Fargo pleased
traders, in part as it indicated further mergers and acquisitions might be on
the cards.
The week’s biggest event was of course ‘black Monday’ as the senate rejected
the proposed US $700bn bailout package. Confidence waxed and waned throughout
the rest of the week, but ironically it was the passing of the amended
bailout bill that sparked a major reversal on Friday. US markets closed down
below Monday’s lows with the Dow closing at its lowest level for nearly three
years.
Dire housing figures were released on both sides of the Atlantic, with the UK
and US house price collapse showing no signs of a turn around. There were
record declines in the Case-Schiller house price index, which put house
prices down 17.5% year on year. UK house prices also registered record
declines as the average cost of a home fell 12.4% from a year earlier. The
lockdown in the credit markets is having a significant effect on the housing
market. Without access to mortgages at reasonable rates, mortgage approval
rates have tumbled by over 90% in the UK over the last year.
Virtually all aspects of the credit markets are locked down, from money
markets to the Treasury market. Three month Libor for Euros, the London
Interbank Lending rate hit 5.33% last week, an all time high. With no
confidence in each other’s financial positions, banks have simply stopped
lending to each other.
As a sign of the level of the crisis, the ECB last week shifted its focus from
fighting inflation, to the problems in the economy. Until now, ECB chairman
Trichet has kept the focus almost entirely on fighting inflation, even as
Ireland formally slid into recession. A Eurozone rate cut is looking likely
in the next two months, this news and benign oil price action pushed the
European single currency to its lowest level against the Dollar for over a
year. In the US, Fed Fund futures moved to price in a 50bps cut in interest
rates before the end of the month. Although the futures market can get it
very wrong, the price available is currently inferring a 100% probability of
a cut.
Next week’s major economic announcements start on Tuesday with ECB chairman
Trichet and FOMC chairman Bernanke due to speak. Tuesday evening also sees
the release of the minutes from the last FOMC meeting. With traders
speculating on an imminent rate cut and events moving quickly since the last
meeting, the minutes may now be a little out of date. However, they will
still be examined in detail for clues on future policy decisions. In the UK
manufacturing production figures are released in the morning with Halifax
hours price figures planned for release some time throughout the day.
Thursday sees the Bank of England’s MPC set interest rates. Traders are
currently pricing in a quarter point cut.
According to Jason Goepfert at SentimenTrader.com “the only other times in its
history that the S&P 500 lost more than it did this week were the weeks of
10/19/87, 04/10/00 and 09/17/01 – all three times it bounced back the
following week (by an average of +5%) and following quarter (by an average of
+8.9%).†Although a failure to hold above last week’s lows in the first few
days of next week could spark further selling, there is at least the
potential for a significant snap rally in the next few weeks, said
BetOnMarkets.com traders. At BetOnMarkets, traders placing a One Touch trade
predicting the S&P 500 to touch 1180 at any time during the next 16 days
could return 100%.
-The End-
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