'There cannot be a crisis this week; my schedule is already full'
So said Henry Kissinger and it was a sentiment shared by many at the beginning of the week but unfortunately heeded by none, as global markets plunged even further into turmoil.
What a week. If anyone could make sense of it, they would be in a better position than most. One Bloomberg economist was embarrassingly stumped on live TV, admitting he just did not know what was going to happen.
If the true definition of a crisis is the suspension of reality, then this my friends, is a crisis. The fundamentals that tend to steer the course of markets have been sidelined by a wave of panic and fear which are now driving equity and currency movements. Governments and central bank intervention has failed to restore confidence as yet and the fears over global recession are looming large in the minds of many.
To quickly recap, the UK government announced a bail out package for the British banking sector in an attempt to ‘get back to basics' for banks this week. This included the proviso for government to buy preferential shares and make over £200 billion pounds available for lending under the extended Special Liquidity Scheme, making British taxpayers effectively shareholders in the financial system. Sterling suffered volatility as the plan was announced and never before had a curry so captured the national interest than the “£200 billion dollar balti” that Darling et al dined on while discussing the deal.
On Wednesday at 12 noon came the shock announcement from the Bank of England, ECB, Federal Reserve as well as central banks in Sweden, Canada and Switzerland of a co-ordinated interest rate cut of 50 basis points to provide stability for global markets. Base lending rates are now at 4.5%, 1.5% and 3.75% in the UK, US and Eurozone respectively with the expectation of further cuts to come.
Iceland has been the story of the week in the Eurozone due to the collapse of its three major banks and freezing of the financial system. With uncharacteristic vigour, Gordon Brown has branded the actions of Icelandic banks “totally unacceptable and illegal” after the loss of £1 billion worth of British investments and stated he is willing to use anti-terrorism legislation to effectively embargo Icelandic assets in the UK.
The consequence of these major announcements, and spiralling bankruptcy fears as liquidity remains thin and credit hard to come by, has fuelled global panic leading to a freefall in equity markets. The Dow Jones has plunged for the seventh straight day in the US, making this the worst week for share markets since the 1970's. This morning Asian, European and UK shares have also plummeted with the FTSE down 10% and the Nikkei down 9.6%.
With fear and panic dominating trading, markets are shell-shocked and flighty with little of the usual stability to absorb and react to the positive news from governments. Everyone is wondering whether the moves will be enough or is if too little, too late? Complete disregard for stabilising fundamentals has led to huge currency volatility and the phones at currency houses have been ringing off the hook. The Australian, New Zealand and South African Rand in particular have been through some massive changes, most notably on Thursday when Sterling ranged between 2.79 and 3.0 New Zealand Dollars and 2.45 to 2.70 Australian. Such events illustrate the importance of timing when it comes to foreign exchange.
In terms of the coming week, prediction remains difficult while the markets are still in crisis mode. Panicked investors are behaving irrationally, news stories are magnified and more rumours than a Fleetwood Mac album are triggering a vicious cycle of reactions that have further undermined market confidence.
Government attempts to inject stability into global markets are yet to trickle through, as is the decline in oil prices. Until this happens and equity markets stabilise, we can expect currency to remain volatile. Up to the minute information is crucial and I would advise keeping the line to your currency dealer open. The G7 meeting taking place in Washington today should have important ramifications for market confidence.
Have a good weekend!