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We still find it hard to understand what can justify stock markets rebounding on so little positive news. As a very witty, but awfully true UK TV skit pits it, “Markets are driven by sentiment” (www.youtube.com/watch?v=SJ_qK4g6ntM). Unless this is a “Tuesday effect”. On the same day that Goldman Sachs announced it was well protected against sub-prime related exposure, and Wal-Mart announced satisfactory results in its US stores, Bank of America announced a USD 3 billion sub-prime hit, money market funds were being bailed out by Legg Mason and others, and Home Depot reported a big drop on sales. Now HSBC, the first to report sub-prime losses, is “confessing” to still more.
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The infamous “level three” assets on bank balance sheets almost certainly will give financial directors and auditors major headaches at year end. Just how do you value an asset with no secondary price? “SOX” infers a greater severity than even the accounting rules. No, we cannot believe that a “Tuesday stock market rebound” says much about whether the liquidity crisis is nearing an end, nor whether an improved Wal-Mart performance suggests that US consumers continue spending more than they earn. A day’s euphoria does nothing to halt the decline in US house prices in the context of a shift in global economic power.
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A month ago we clearly spelt out the dilemma facing the Fed, to lower rates to keep the economy going or raise them to help hold inflation at bay. Our supposition (and that of the market) is that concern about the economy will trump inflation worries, and that the USA will just have to live with higher inflation and a weaker dollar. At least the dollar’s fall to date is helping US exports.
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We have been bearish on the USD for several years. In fact, we often wonder why any non-US investor would want a fundamentally weak currency in their portfolio, although of course some do! Over the last five years our USD volume has fallen significantly.
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Some doomsayers write of a significant chance of a melt down in the banking system. Our readers will know that we lean to a slightly pessimistic interpretation of events (we prefer to say “realistic”), but we cannot go so far as the doomsayers. Banks have made huge profits for many years, and a set-back in the second half of 2007 implies little more than “marking time”, despite the problems of capital adequacy that we described last week. The banks will easily survive, even if some ownership changes take place, especially with the coincidence of both low share prices and a weak dollar making some US banks vulnerable to foreign acquisition.
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This last week has seen a significant shift to quality in the bond markets, at the expense even of our favourite, sovereign emerging markets in domestic currencies. Yet the fundamentals for many emerging markets and their currencies remain entirely positive. Just as the fundamentals put stock market rebounds into context, they are also reassuring on the essential attractiveness of many emerging markets.
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The French public sector strikes look like being more damaging than usual. Sarkozy could not be clearer in his determination to proceed with reforms, and we can but hope that he insists that for the majority of French who are not fonctionnaires that there is something short of égalité in the privilege of retiring at an early age on a full pension. He should suggest that the fonctionnaires show a little fraternité while affirming their liberté!!
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Focus |
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(!) USD : Sarkozy alludes to the risk of economic war if the exchange rate is not adjusted soon. The USD has also fallen to 1.126 against the CHF, its lowest since 1995
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(?) inflation: the best performing T-bonds are Treasury Inflation Protected Securities (TIPS)
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(!) Contagion : the German publicly-owned bank WestLB has announced a serious loss for 2007, becoming the latest victim of the US sub-prime contagion. Deutsche Bank will also announce losses
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(?) France : purchasing power has scarcely improved in recent years. The proportion of the population on the minimum wage has gone up from 8.6% in 1991 to 15.1% in 2006
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(–) Venezuela : rumours of demonstrations against the constitutional reform
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(+) Kazakhstan : Unicredit SPA has paid USD 2.12 billion for the control of AO ATF BANK (5th Kazakh bank)
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(+) positive for bonds (–) negative for bonds (!) watch out (?) begs a question |
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