09/10-08   -   Press releases

Bailout Dramas Generate More Stock Market Black Mondays

Another dramatic weekend saw four banks receive government bail outs, not to mention the further file sales and mergers. Mondays have been chaos for the last few weeks, as governments on both sides of the pond prefer to work through major announcements, mergers, and bailouts, over the relative calm of the weekend. Although Bradford and Bingley grabbed the headlines in the UK, governments in Belgium, the Netherlands, and Luxemburg had to throw billions at Fortis, while Germany guaranteed loans to Hypo Real Estate. In the US, investors waved goodbye to Wachovio as a takeover by Wells Fargo pleased traders, in part as it indicated further mergers and acquisitions might be on the cards.

The week’s biggest event was of course ‘black Monday’ as the senate rejected the proposed US $700bn bailout package. Confidence waxed and waned throughout the rest of the week, but ironically it was the passing of the amended bailout bill that sparked a major reversal on Friday. US markets closed down below Monday’s lows with the Dow closing at its lowest level for nearly three years.

Dire housing figures were released on both sides of the Atlantic, with the UK and US house price collapse showing no signs of a turn around. There were record declines in the Case-Schiller house price index, which put house prices down 17.5% year on year. UK house prices also registered record declines as the average cost of a home fell 12.4% from a year earlier. The lockdown in the credit markets is having a significant effect on the housing market. Without access to mortgages at reasonable rates, mortgage approval rates have tumbled by over 90% in the UK over the last year.

Virtually all aspects of the credit markets are locked down, from money markets to the Treasury market. Three month Libor for Euros, the London Interbank Lending rate hit 5.33% last week, an all time high. With no confidence in each other’s financial positions, banks have simply stopped lending to each other.

As a sign of the level of the crisis, the ECB last week shifted its focus from fighting inflation, to the problems in the economy. Until now, ECB chairman Trichet has kept the focus almost entirely on fighting inflation, even as Ireland formally slid into recession. A Eurozone rate cut is looking likely in the next two months, this news and benign oil price action pushed the European single currency to its lowest level against the Dollar for over a year. In the US, Fed Fund futures moved to price in a 50bps cut in interest rates before the end of the month. Although the futures market can get it very wrong, the price available is currently inferring a 100% probability of a cut.

Next week’s major economic announcements start on Tuesday with ECB chairman Trichet and FOMC chairman Bernanke due to speak. Tuesday evening also sees the release of the minutes from the last FOMC meeting. With traders speculating on an imminent rate cut and events moving quickly since the last meeting, the minutes may now be a little out of date. However, they will still be examined in detail for clues on future policy decisions. In the UK manufacturing production figures are released in the morning with Halifax hours price figures planned for release some time throughout the day. Thursday sees the Bank of England’s MPC set interest rates. Traders are currently pricing in a quarter point cut.

According to Jason Goepfert at SentimenTrader.com “the only other times in its history that the S&P 500 lost more than it did this week were the weeks of 10/19/87, 04/10/00 and 09/17/01 - all three times it bounced back the following week (by an average of +5%) and following quarter (by an average of +8.9%)." Although a failure to hold above last week’s lows in the first few days of next week could spark further selling, there is at least the potential for a significant snap rally in the next few weeks, said BetOnMarkets.com traders. At BetOnMarkets, traders placing a One Touch trade predicting the S&P 500 to touch 1180 at any time during the next 16 days could return 100%.

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