Tonight We're Gonna Party like it's 1929
First uttered by Prince in 1982, but perhaps more poignant for a Lehman's employee, HBOS employee, Gordon Brown, take your pick…as we have experienced one of the most tumultuous weeks the market has seen in decades. Richard Fuld had possibly the most chronic case of Monday-itis in history, made all the more enjoyable I'm sure by thousands defacing his portrait outside the office. And flying in the face of the recession was Damien Hirst, laughing himself all the way to the (hopefully not Lehman's) bank with his art netting record prices at Sotheby's.
As you will know by know, Monday 15 September delivered the news that Lehman Brothers, the fourth largest securities and investment bank in the US, filed for bankruptcy. Following the collapse of negotiations with the Korean Development Bank, Barclays and Bank of America to ensure liquidity, Lehman's filed for bankruptcy, setting into motion a chain of seismic events that have shaken financial markets to their core.
Following Lehman's, casualties of the credit crunch began to mount as banks showed their hand, revealing the extent of their bluff. Merrill Lynch was sold to Bank of America for $50 Billion, insurance giant AIG was bailed out by the Federal Reserve and Lehman assets were bought by Barclays for £2 billion. The honeymoon period expected after the Federal Reserve intervention to bail out Freddie Mac and Fannie Mae was abruptly cut short. Stocks and shares plummeted, the US Dollar sunk and over a matter of days $3 trillion was wiped off the market.
In the UK, a $22 billion pound merger between Lloyds TSB and HBOS, the biggest in British history, was hurried through in an attempt to inject confidence into British markets. Currency fluctuations have mirrored market trends towards instability this week with gains to be made for hawk-eyed traders. Up to the minute information is crucial in this volatile environment, speak to your dealer for the latest news.
The response from Governments and Central Banks around the world has been immediate and hawkish. The Federal Reserve has co-ordinated moves to inject $247 billion worth of emergency funds to facilitate inter-bank lending and improve shallow liquidity.
Most recently, a US government plan to create a federally sponsored entity to house “toxic debts” of financial institutions sent share prices soaring in the US and UK as a wave of optimism swept markets. The plan will be subject to congressional approval, but alongside the temporary ban on short selling, contributed to a rally in shares that provided the largest gain in 6 years for AIG. The London FTSE 100 index gained over 300 points in early trading this morning and the Pound gained against the dollar overnight.
This overwhelming combination of news has led to a vociferous outpouring of superlatives from commentators and claims of a “tectonic” shift in financial landscapes. Although market conditions have been characterised by responsive moves and flighty investors, Sterling has been showing resilience and the Euro has also retained its composure. Polish Zloty and Czech rates are stronger with most major currencies unpredictable at the moment, waiting on the fall out of Sterling and Dollar.
Economic data from the UK has been muted this week in relation to the fireworks on Wall Street but is insightful nevertheless. MPC minutes reveal members voted 8-1 to keep interest rate cuts on hold and The Bank of England announced the extension of its Special Liquidity Scheme. The FSA has placed a ban on short selling until 16 January 2009 and British retail data released yesterday continues to confound expectations, showing the number of sales is up 1.2% for August and 3.3% for the year.
Commodities have gained in value as nervous investors favour tangible assets. Oil is up to $98 a barrel after hovering around $92 all week and gold posted a 10% rise on Wednesday, one of its largest gains ever. Perhaps we will see a few more Hirst's on the market, not a bad idea considering the figures - you could practically buy a bank for that these days!
Have a good weekend