I need a hero!
Is Gordon Brown belatedly responding to the lyrics Bonnie Tyler sung back in 1986?
The newly minted ‘Flash' has been one of the major winners of the latest phase in the credit crisis as his bank recapitalisation plan has sent Labour polls soaring in contrast to global stocks. Another crazy week for markets has seen panic and recovery followed by a fresh round of panic, as nervous investors have leaped out of the frying pan of crisis, and into the fire of recession.
The City began the week clutching at the neck of ‘Flash Gordon', financial saviour and ‘world leader' as he unveiled a recapitalisation package for UK banks and extra liquidity for frozen credit markets which have all but paralysed the global finance industry. Such unprecedented and comprehensive action was mirrored across the Eurozone where co-ordinated government efforts from France, Spain, Germany and Austria with Italy, Sweden, Norway, and Poland following later saw 2 trillion pledged to shore up ailing markets. In the US, Bush offered an extension of the Federal Reserve rescue package after the initial plan to absorb toxic debts failed to quell investor panic. The extension makes a further $250 billion available to underwrite lending, ensure liquidity and for the government to own preferential shares in nine major US banks.
The impact for markets was overwhelmingly positive, with the Dow and the FTSE experiencing the largest rally since 1933, after having fallen by more than 20% in the previous week. However, like lifting the mask and realising the ‘Flash' really only was Gordon Brown after all, a sense of widespread disappointment began to settle over markets as uncertainty over global growth prospects hampered investor confidence.
Thus gains early in the week have been erased as the recent glut of domestic data has shown that the global economy is in for a long, steep climb out of the quagmire. UK jobless claims have risen to 1.79 million and could reach 2 million by Christmas. The unemployment rate is currently running at 5.7% and could peak at 6.5% by the end of the year. Consumer Price Inflation hit a 16 year high of 5.2% driven by spiralling food and energy prices and reflecting peak oil over summer.
In the US, Consumer Price Inflation is running at 4.9% and the Philadelphia Manufacturing Index came in at -37.5 yesterday showing a negative outlook for the manufacturing sector in the last quarter of 2008. In the UK and US, where confidence and retail spending are key drivers of the economy, such figures indicate we are indeed approaching recession territory. The only relief comes in the news that oil has plummeted this week, reaching a low of $69 a barrel, making it likely inflation will peak in the near future and economists are predicting a further rate cut of 50 basis points in both the US and UK before year end.
Overnight a freshly baked batch of panic has triggered more selling around the world meaning the FTSE has suffered one of its worst days in five years, closing down 5.7% with the German DAX down 5.9 and the French CAC down 4.9%.
At present, concern over the prospect of global recession is continuing to plague markets with dysfunction and currency volatility set to continue until the flow of credit is restored and investor confidence returned. Although upward momentum has been experienced, gains have just as quickly been wiped exposing the unease that is hovering just below the surface and the situation remains combustible.
The swift and comprehensive response from governments should help with the restoration of confidence as they have indicated the extent to which they will go to shore up credit markets. But in this panic mode, there really is no telling where the bottom is and just how deep government pockets are. The major challenge at present is to unlock credit flows amongst banks as a starting point for recovery.
Currency markets remain subject to significant volatility as shockwaves continue to reverberate throughout the global economy. Sterling has been trading in the 1.60-1.70 range versus the US Dollar this week and the Euro has remained relatively resilient with stabilizing oil prices expected to ease trading in European markets today. The Swiss franc has recovered slightly after suffering a knock to its reputation as a safe haven after UBS and Credit Suisse have been on the receiving end of bank bail outs.
My key advice is to be ready; exchange rates are still highly volatile. Swings in the vicinity of 12-15% have been recorded, particularly amongst the Australian, New Zealand Dollar and the Yen as ambivalent investors flit between the higher yielding and risk adverse currencies. In this sense, it is worth taking time to open an account as brief highs can make momentary trades very lucrative. Keeping a line open to your dealer is the best advice I can give at the moment.
Have a good weekend!