Another Rescue Package, Another Day
15/10/08 19:53
The wave of contentment inspired by the global rescue
packages for banks has faded in similar fashion to
any previous rescue "plan" as the market digests the
full implications on global economies. The US
Treasury's decision to take equity stakes in US
banks, totalling up to US$ 250 bln is marks a major
step towards a gradual resolution of the credit
crisis, though Paulson himself yesterday warned
against expecting any speedy return to normality and
said that more steps may need to be taken. In other
words, Paulson is cognizant of risks that may
eventually pound on the markets driving them deeper
still.
Clearly, we are in an all time unique market environment as markets have become structurally risk averse, and higher funding costs will likely be a permanent feature. Equity markets in Europe are once again weaker as investors now have an opportunity to rationally price in prospects of a fully-fledged global recession, an inevitability the has been politically denied as long as possible. In the FX space risk currencies are also giving up some of Monday's gains; USDJPY is lower on the day in a range of 100.91-102.25, while EURUSD also weakened to 1.3533-1.3620. Although risk has come down sharply, its current level remains higher than at any time before the current round of turmoil erupted and we caution against expecting a swift recovery. Today's LIBOR fixings have shown a further decline in interbank lending rates but the speed of the falls will probably disappoint policymakers, who have hoped that official guarantees on bank debt would have boosted banks' willingness to provide funds and have provided a clear indication of the potential for further rate cuts. Clearly, the next step in containing a recession would entail fiscal measures, but within the G10 space most governments are already facing stretched budgets and banking rescues have resulted in further fiscal burdens. As such, if markets do not return to the extremes witnessed over the past few weeks, relative value plays on currencies will becoming increasingly important and a key determinant of value will be at what stage of an economic slowdown cycle any economy presently finds itself. Central banks will also act accordingly those currently behind the curve in the need for cuts will see their own currencies coming under pressure as growth prospects dim and investment flows unwind, AUD, GBP, EUR, for example. We should continue to see the dollar benefiting from improving home bias, and remain cautious on chasing risk appetite higher from current levels. Bernanke's comments today should provide further insight to the underlying issues, if you read between the lines.
Good Luck with your trading and be careful out there.
Chris Lori
Ref UBS