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The Americans are starting to get it.
The Dow Jones index dived by more than 300 points yesterday, closing at a 10-month low of 12,159. And to think not so long ago, all the talk was of Dow 14,000.
The country is facing recession. It may well already be there. The trigger for the loss of confidence was the fact that Ben Bernanke, the Federal Reserve chairman himself, practically admitted it.
Of course, he didn’t say it out loud. In fact, in his testimony before Congress yesterday, he made it very clear that he wasn’t forecasting recession. All the same, he added, if politicians could see their way clear to dishing out some free money (just temporarily, of course) then it might “provide broader support for the economy”.
So the head of the central bank is pinning his hopes on politicians saving the US economy. No wonder stocks tanked…
Economic data on the US yesterday was grim, which we’ll get to in a minute. But it was really Ben Bernanke’s plea for help to Congress that terrified the markets.
It’ll take more than rate cuts to save the US economy
As Art Hogan of Jefferies & Co told MarketWatch, “when reminded about how bad things are, the market remembers it should go down.” And the worst of it is, that investors have now realised that “it is going to take more than just monetary policy to clean up the mess we‘ve made with this economy.”
Basically, Mr Bernanke has his hands on the reins of monetary policy. He can pump the economy full of credit, just like his predecessor Alan Greenspan always did, by cutting interest rates. Now under Mr Greenspan, this worked very nicely – but that‘s because there were still bubbles left to inflate. But now the biggest of them all, the credit bubble, has burst, and Mr Bernanke‘s little money machine just doesn’t seem to be doing the job anymore.
So he’s turning to the Government. It controls fiscal policy, which is about controlling the economy through public spending and tax-setting. He wants any package to be “implemented quickly” and “explicitly temporary”. He reckons the best way to go about it is to get more “money to low and moderate income families”.
As Micheal Gregory of BMO Capital Markets put it, “you know central bankers are concerned about the economy when they condone stimulative fiscal policy.” It’s never ideal to rely on any government for help. But this is election year, and so comes at a point when the chances of the Democrats and Republicans managing to agree on anything together are slim to non-existent. David Greenlaw of Morgan Stanley said: “We suspect that things may get bogged down when the discussion inevitably turns to the specific measures that will be included in the final package.”
The news on the economy keeps getting worse
Meanwhile, the rest of the news on the US economy did nothing to inspire investors. Manufacturing in the Philadelphia area shrunk in January. The index fell to negative 20.9, its lowest since October 2001 – analysts had only expected minus 1. A reading below zero suggests that most of the manufacturers in the region are seeing business conditions deteriorate.
Worse still, despite falling activity and drops in new orders, price pressures remained, showing that the spectre of inflation hanging over the US economy is far from dead.
And of course, the news from the housing market isn’t getting any better. Construction on new homes fell 14% in December, to the slowest building rate seen in more than 16 years.
And all of this was before you consider the state of companies themselves. Merrill Lynch wrote down $11.5bn in sub-prime assets and a further $2.6bn on related assets, leaving it with a higher-than-expected loss of $14.9bn for the final quarter of 2007.
But probably the biggest fear is the condition of US bond insurers. The largest, MBIA and Ambac Financial “have a more than 70% chance of going bankrupt”, says Bloomberg, at least if you consider how much the market is charging to insure their debt. These big bond insurers are critical to the bonds market. They guarantee $2.4 trillion in debt, including subprime mortgage securities. Their AAA credit rating is therefore placed on the securities they back.
Needless to say, if they lose that AAA rating, so do all the bonds they’ve guaranteed. And if that happens, there’ll be a massive fire sale, as those investors who are only allowed to hold the safest bonds will have to sell them off. It could cost “borrowers and investors as much as $200bn”, reckons the newswire.
The very firms who have underwritten the credit boom are now in danger of defaulting on their guarantees. Stock market investors are right to be panicky – it’ll take a lot more than politicians sending poor people some tax rebates through the post to bail the US out of this one.
Turning to the wider markets…
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Asia stocks reverse losses
In London, the latest news from Wall Street saw the FTSE 100 index sink 40 points to end the day at 5,902, with miners dominating the bottom end of the table. However, the broader FTSE 250 finished the day with modest gains. For a full market report, see: London market close
On the Continent, the Paris CAC-40 closed 68 points lower, at 5,157. And the Frankfurt DAX-30 was down 58 points, at 7,413.
Across the Atlantic, stocks registered a third consecutive day of falls. The Dow Jones tumbled 307 points in all to end the day at 12,159. The tech-rich Nasdaq was 47 points lower, at 2,346. And the S&P 500 was also down 39 points at 1,333.
In Asia, Tokyo reversed initial losses to close 77 points higher, at 13,861. In Hong Kong, the Hang Seng rose 86 points to close at 25,201.
HMV enjoys a record-breaking Christmas
Crude oil futures had edged up to $90.39 this morning and Brent spot was at $89.48 in London.
Spot gold hit an intra-day low of $870.10 today before climbing back to $876.40. And silver had fallen to $15.79.
In the currency markets, the pound was last trading at 1.9688 against the dollar and 1.3451 against the euro. And the dollar was at 0.6830 against the euro and 107.00 against the Japanese yen.
And in London this morning, fund manager New Star Asset Management fell as much as 44% this morning on a fall in assets under management and poor performance of its investments.
Our recommended article for today…
The dollar looks fragile – but sterling’s far worse
– The old adage that you should never bet against the US consumer looks set to be proved wrong this year. But does it make sense to bet against the US dollar? To find out why the dollar could be set for an upswing, whilst sterling looks decidedly sickly, read: The dollar looks fragile – but sterling’s far worse