Mr. Market Ignores the Bad
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Megabank announces $19bn write-down, a rights issue to shore up its balance sheet and its chairman resigns. What does the stock market think? It marks the shares up 12%.
That’s what happened to Swiss bank UBS yesterday. “So this is good news?”, asks a bemused Lex in the FT. Also, Deutsche Bank writes down $3.9bn and its stock goes up nearly 4%. American investment bank Lehman Bros, a suspected Bear Stearns Mark II only a few short days ago, announces an additional $1bn capital raising. Its shares leap 18%.
But then stocks everywhere had a positive day yesterday with the rally continuing into a second day this morning. “Stocks rise in spite of fresh bank woes,” reads the FT headline headline. Reuters calls it the “Write-down relief rally”. The S&P 500 was up more than 3.5% on Tuesday, the FTSE 100, 2.6%. The Nikkei rose 1% on Tuesday and another 4% today.
Why is Mr. Market now laughing in the face of adversity? Are we seeing a dead cat bounce? The FT considers the possible impact of short sellers scrambling to buy back positions when the market goes against them so intensifying the buying. The possibility too, is that investors are beginning to think the eye of the storm has now past. The banks are coming clean, maybe, though we’ve yet to hear from subprime gorgers Citigroup and Merrill Lynch. Kevin Gardner, head of global equity strategy at HSBC tells the FT it’s too early to call a turning point for stock markets. Though after a credit crunch, a US investment bank failure and a mortgage bank failure here at home a “heck of a lot” of bad news is in the price.
Continues below …
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Perversely, UBS helped the dollar, along with good news from a US manufacturing report. Safe haven assets such as government bonds and gold - which hit a two month low of $880 - fell as the risk appetite reappeared. Oil futures briefly dipped below $100. Don’t fall for it, says David Brown, economist at Bear Stearns, the dollar’s been on a down slope since last August but occasionally there’s a counter-trend rally. Paul Ashworth of Capital Economics adds the manufacturing news wasn’t so great. Effectively, they fiddled the numbers. Changing the calculation methodology gave a better read. There’s a first!
Well the bad news may or may not be all in the price. But this one-time financial sector problem is more and more showing up as everyone’s problem, as it ripples out into the high street. The rate at which banks lend to one another is still a lofty 6%, and daily there is less money available for funding debt-driven lifestyles - mortgages, personal loans, credit cards.
Lending rates are being hiked wholesale and mortgage offers withdrawn, sometimes with brutal haste: this seems counter-intuitive against a backdrop of interest rates trending down. Nationwide building society, Halifax, NatWest and its parent RBS are just some of the major names that have increased their lending rates. Those left standing with a good deals are being inundated. Yesterday First Direct, part of banking giant HSBC, suspended new mortgage lending after it was “swamped” with mortgage applications for its highly competitive two-year fixed deal at 4.95%.
From a highly competitive mortgage market place where lenders - pre credit crunch - were prepared to lend below their cost of funding to maintain market share, we are now in a market where lenders don’t want to lend whatever the central banks do with interest rates. George Soros explains to the BBC’s Robert Peston:
“You can’t rekindle the willingness to borrow and the willingness to lend because the balance sheets of the banks are now over-burdened and there are all kinds of risks that have become apparent. And they haven’t yet fully worked themselves out, so there’s a great deal of unknown credit risk in the system. And as a result, the banks are husbanding their resources because they’ve actually lost a lot of money…”
As for the UK’s interest rate outlook it remains murky, in spite of anticipation of a further 0.25% cut this month or next to take us down to 5%. Factory gate inflation hit a new high as manufacturers passed on higher energy costs with higher prices. And, ominously, problems appear to be brewing in public sector pay. The National Union of Teachers has voted to strike for the first time in more than 20 years - a one day strike on April 24th for more money. They want a 2.45% pay rise increased to at least inflation. CPI is currently 2.5% but RPI is 4.1%. They want to see their pay, at least in real terms, maintained. Understandable but it adds to the difficulties facing Mervyn King and the Bank of England Monetary Policy Committee in balancing the need for lower interest rates with the inflation fight.
As more liquidity gurgles out of the system, and mortgage rates go up talk of a house price crash comes to the fore. “London House Prices: Slump Starts”, screams the London Evening Standard from its front page last night after Land Registry figures recorded a 0.4% fall in February. My thinking we’re looking at a stagnant housing market over a slumpy one is taking a lot of heat these days. 6% LIBOR…vanishing credit…dearer credit…few buyers (even fewer first timers)…plenty of stock…possibly even more after April 6 if buy-to-let investors decide to cash in under the new capital gains tax regime. I have to admit, it’s not looking pretty…
*** More on the food crunch. “Countries rush to restrict trade in basic foods”, reads the FT headline. Tariffs on food imports are being scrapped and tariffs on exports hiked as the developing world responds with alarm to the urgent and potentially acute problem of food shortages.
“World food stocks have never been lower,” India’s trade minister Kamal Nath tells the FT. Saudi Arabia announced they would cut import taxes on a range of foods yesterday as did Egypt. India did much the same on Monday and banned the export of some rice.
Regards,
Rob Mackrill
The Daily Reckoning
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