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To Treat The Threat of Economic Turmoil
Last week the Bank of England hit the headlines with an unexpected
1.5% rate cut. The move was largely pre meditated as a shock tactic to
boost the ailing UK economy ahead of the all important Christmas period.
Spreading the cut over a number of months would have had much less of an
impact as it can take many months for the benefits of a rate cut to
filter down to consumers. This is especially the case now with banks
being slow to pass on cuts to customers. The MPC have sent out a message
that they are prepared to treat the threat posed by the global slowdown
very seriously. Unfortunately this message is a double edged sword, the
euphoria that immediately met the rate cut was short lived and the FTSE
soon rolled over and headed back towards the lows of the day.
There is also the possibility that today's rate cut might make it less
likely that the MPC will cut again in the near future. Experts had been
calling for cuts of this magnitude over a number of months, but the MPC
may have bundled all their planned rate cuts in one dramatic roll of the
dice. It may be some time before they cut again, preferring to let the
dust settle on the biggest single cut in a generation.
Friday's US payroll figures were ugly by any measure, with the reported
loss of 240,000 jobs slightly worse than expected. The worse data point
to come out was actually the downwards revision to Septembers payroll
figures, which pushed September payrolls down from -159,000 to -284,000.
This means that so far in 2008, over 1 million jobs have been lost, most
of these have been in the financial sector but the slump is prevalent in
virtually every US sector.
On the face of it, it was perhaps surprising to see equity markets
rebound so strongly on Friday, especiall y in the face of accelerating
unemployment in the world's biggest economy. However, the reality is
that financial markets are forward looking, which means that most of the
time the bad news is already taken into account when it comes. Friday's
payroll figures could have been even worse than they were and judging by
the rebound we're seeing, a significant part of the falls on Wednesday
and Thursday may have been traders rushing in to sell ahead of Friday's
numbers. The net result is that the preceding two day sell off appears
to have overshot slightly.
On the credit markets, libor and credit default swaps continue to
improve for the worlds largest financial firms. The cost of insuring
against companies defaulting on their debt is still very high by
historical standards, but they have still come down a long way in the
last few weeks. Morgan Stanley and Goldman Sachs still remain a concern
while the UK's HSBC currently has the lowest CDS of the remaining major
independent banks and brokers. In short, things have most certainly
improved since the dark days of October, but there is a long way to go
before we can say safely say that this credit crisis is over.
Next week starts with UK PPI figures and with ECB president Trichet
commencing a series of speeches along side other central bankers
throughout the week. The ECB's 50bp cut was largely expected last week,
but there were some bold last minute predictions of a 100bp cut.
Investors will be listening carefully for any hints from Trichet on
future decisions. Friday promises to be the week's busiest day with US
retail sales and Fed chairman Ben Bernanke speaking at the 5th ECB
central banking conference.
Last week Morgan Stanley's European strategist Teun Draaisma commented
that stocks were now flashing a "full house" buy signal. According
Draaisma markets have now fully priced in an earnings recession and
retail investors, purchasing manager and sell side analysts have
capitulated. Although very early in predicting the recovery in 1998, he
wasn't far off in 2002. His full house sell signals timed the tops of
2000 and 2007 almost to perfection though. With this in mind it might
indeed be the case that markets have already moved to discount the
coming recession and are looking forward to what will happen beyond
that.
"A bull trade predicting that the Dow Jones Industrial Average will be
higher than 9500 in 6 months time could return 102% at BetOnMarkets."
Author: Mike wright
Company: Betonmarkets
Email: editor@regentmarkets.com
URL:www.betonmarkets.com Disclaimer:
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