| US : Government abandons plans to buy banks’ troubled assets |
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The US equity market fell again last week as confidence was hit by deteriorating economic data, poor corporate results, warnings about possible bankruptcies in the autos sector, and renewed fears for the financial sector after the government abandoned plans to buy troubled mortgage assets from the banks. The Dow Jones ended 5.0% lower while the technology-biased NASDAQ dropped 7.9%. |
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Technology companies were among the worst hit as chipmaker and sector bellwether, Intel, issued a profits warning, while Google, Apple and Dell all suffered earnings downgrades. |
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Economic data failed to provide any comfort. US headline retail sales plummeted by 2.8% month on month, the most since records began in 1992, while US initial jobless claims rose to 516,000 - their highest level since just after 11 September 2001. |
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Further volatility was caused by the US Treasury’s decision to abandon its plan to purchase distressed mortgage-related assets from the banks, which was formerly the key part of its much heralded USD 700 billion Troubled Asset Relief Program (TARP). |
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The focus of the TARP has shifted instead towards support for consumer credit and further recapitalisation of the banking sector. The conclusion that seems to have been reached is that the banks can probably manage the illiquid mortgage assets better than the government, but that they need more capital to do so. |
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Notably, the provision to provide capital will also be extended to non-bank financial institutions, such as help for the beleaguered auto sector. It is likely, therefore, that the capital purchase fund within the TARP of USD 250 billion will need to be increased – as may the funding for the whole of TARP. |
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| EUROPE : German economy contracts for second successive quarter |
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European stock markets fell amid poor economic data. The UK FTSE 100 and Swiss SPI performed best, both falling 3.0%, while the German DAX and French CAC 40 fell 4.6% and 5.1% respectively. The MSCI Europe declined 4.6%. |
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The Eurozone economy contracted 0.2% QoQ in the 3Q'08, seasonally adjusted. GDP contracted in Germany, Italy and Spain, although French GDP was positive. Germany is now in a technical recession after two consecutive negative quarters. |
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Eurozone industrial production was also weak in September, declining 1.6% month on month (m/m), and consumer price inflation fell to zero in October, from 0.2%m/m in September, as energy inflation slowed. |
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The UK Monetary Policy Committee’s quarterly inflation report negatively surprised the market by suggesting that the 3.0% interest rate cut is significantly too high to generate the target inflation level two years hence, thereby signalling that they intend to cut rates further in the near term. |
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Not surprisingly, sterling’s decline accelerated during the week. Furthermore, the CBI now predicts a similar recession to 1991 and forecasts 9% unemployment by 2010. |
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| ASIA : Economic concerns increase across the region |
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Stock markets in the Pacific region made large losses at the start of the week, before recovering slightly towards the end of week. The MSCI Pacific ex-Japan index declined 5.5% in local terms, 7.2% in US dollars. |
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The massive Chinese fiscal stimulus package failed to bring immediate relief. Instead, Asian bourses followed world markets lower, encouraged by a raft of negative regional data that further undermined the idea that Asia's economic performance will hold up relatively well in 2009. |
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The MSCI China Index managed to gain 1.6% as the Chinese government unveiled a USD 586 billion package to support the country’s slowing economy, mainly through investment in housing and infrastructure. The Chinese central bank also vowed to maintain ‘relatively loose’ monetary policy – an aim helped by a slowdown in the October inflation rate to just 4%. |
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Australia’s All Ordinaries declined 7.0%. The Australian Reserve Bank (RBA) Statement on Monetary Policy explained the recent assertive policy easing, in which interest rates were cut 2.0% in nine weeks, as being due to the onset of the global financial crisis. |
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The Korean KOSPI fell 4.5%. Import prices rose 4.5%m/m, in October, driven by the sharply depreciating KRW, while the producer price index (PPI) fell 0.1%m/m in October, marking a third month in a row of contraction. |
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Hong Kong’s Hang Seng declined 4.9%. Real GDP contracted for a second straight quarter in the third quarter as domestic demand remained subdued and merchandise exports contracted markedly. |
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| JAPAN : 3Q GDP contracted, bringing recession to Japan |
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The Japanese TOPIX fell 4.9%. The Economy Watchers Survey declined to 22.6 in November, recording its largest ever drop. Respondents expressed serious concerns about depressed consumer demand for household durables, weaker overseas demand amid yen strength, and firms' declining hiring intentions. |
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We are at the halfway stage for results - interim profits are down about 25%, with 80% of reporting companies having revised down their FY08/09 earnings estimates. Analysts are now hard at work cutting their FY09/10 numbers. |
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October surveys of consumer and small firm sentiment reinforce this view of an intensifying downturn. Bank lending accelerated last month, but credit conditions are definitely worsening and the acceleration in bank loans may reflect unanticipated borrowing needs. |
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This Monday saw the first estimate of 3Q GDP for Japan, which came in at -0.4% QoQ (saar) versus a flat consensus. With the downward revision in 2Q (-3.7% from -3.0%), two consecutive quarters of contraction in real GDP underscores that Japan's economy is already in recession. |
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All domestic demand components rose in 3Q as a payback from the sharp drop in 2Q, except business capital investment, which had previously declined for three consecutive quarters. The contribution of net trade to real GDP growth was negative again (-0.4%pt annualized), mainly due to the very limited pick up in exports. |
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| EMERGING MARKETS: China stimulus fails to raise GEM spirits |
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Emerging markets were briefly lifted by the announcement of a massive Chinese economic stimulus package, but falling commodity prices, weak currencies and the threat of sovereign defaults led to a further rise in investor risk aversion as the week progressed. The MSCI Emerging Markets Index ended 4.1% lower. |
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News in general was negative as the global financial crisis threatened to claim its first sovereign GEM defaults. In Latin America, Brazil’s BOVESPA was down 2.4% and Mexico’s IPC dropped 1.5%, as investors braced themselves for Ecuador to default on about USD 510m of its foreign loans. |
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Russian stocks slumped (the RTS was down 15.3%) as the threat of a currency devaluation loomed. An exodus of capital due to falling oil prices, political uncertainty and economic weakness has drained Russia’s foreign currency reserves as the authorities try to stem the rouble’s fall against the US dollar. |
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An attempt by the Russian central bank to widen its currency trading band and raise interest rates in order to defend the rouble only served to encourage currency speculators and further deepen the rouble’s losses. |
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Also in Emerging Europe, Turkey’s ISE National 100 dropped 4.6% as further evidence of a slump in economic activity emerged with the release of data showing that industrial production had experienced its biggest monthly decline in October since 2002. |
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Hungary’s economy also moved towards recession as third quarter GDP figures revealed a 0.1% contraction from the previous quarter as export demand from fellow European Union countries dried up. The BUX was down 8.6% for the week. |
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| BONDS & CURRENCY: Rally in government bonds continues |
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Whilst progress has been slow, interbank rates have continued to narrow, a sign of gradual normalisation in the credit space. Prior to the end of last week, 3 month dollar LIBOR had fallen for 24 consecutive days from a peak of 4.82% to 2.13%. This took the spread over the Fed Funds target rate from 332 bps down to 113 bps. |
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The tick up in spreads to 135 bps towards the end of the week indicates that, whilst the interbank markets are improving, stress remains in the system and monetary authorities cannot afford to relax yet. It will take some time before a new equilibrium is established. |
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Another week of grim economic data was bond-friendly. US headline retail sales plummeted by 2.8% m/m, the most since records began in 1992, while US initial jobless claims rose to 516k, the highest level since just after 11 September 2001. |
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The yield on the 10-yr Treasury fell 6bps over the week, that on 10-yr Euro government bonds fell 7bps while the corresponding yield on gilts tumbled 12bps, reflecting the UK's increasingly dire economic outlook. The Barclays Capital Global Aggregate Index continued to deteriorate, with the spread over Treasuries widening by 12bps to +226. |
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Perhaps the surprise right now for governments is how sticky the 10-year US Treasury yield has been given the sea-change for the worse in economic prospects for 2009 and beyond. Impending massive supply increases are the most likely candidate in explaining why T-bond yields have not slumped this year, but have rallied moderately. |
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