The credit crunch is coming to a head, with UK banks facing the prospect of having to swallow £70bn of short-term loans that they can’t refinance in the frozen money markets.
In the US, shocking jobs data has rattled the markets and increased screams for a rate cut.
To top it all, yesterday saw the collapse of the first British sub-prime mortgage lender, Victoria Mortgage Funding. The firm was put into administration as its funding dried up.
It’s not a great outlook. But some analysts reckon there might be enough life in investors for one more big bubble blow-out before the inevitable recession kicks in…
Morgan Stanley’s European strategy team reckons that if – and of course, that’s an important if – the markets pull through the current havoc, we could see a “mania of epic proportions.”
These are the guys who called the top of the market in July, so they’re certainly worth listening to, even if you don’t agree with their conclusions.
They reckofrn that a narrow escape from this particular crisis could lead to a rapid turnaround in sentiment. As Tom Stevenson says in The Telegraph, this isn’t “as far-fetched as it might sound.” A similar narrow escape following the Long-Term Capital Management debacle in 1998 set the scene for the stock market’s “final explosive burst towards its 2000 peak.”
The reason that things were ‘different’ that time was because of the internet. This time, the Morgan Stanley team reckons that emerging markets will be the ‘story’ that everyone latches onto.
They aren’t unrealistic either – they accept that “it will all end in tears, eventually, probably when higher inflation and rates lead to the next recession.” As Stevenson summarises, when that happens, “equities could fall by 50% or more as profits collapse and ratings overshoot to the bargain basement levels with which severe bear markets usually end.” It’s just that they don’t think it will end right now.
It’s an interesting – and dare we say, somewhat contrarian, perspective. Certainly, all the hype about Asia decoupling and the Bric economies becoming the new superpowers suggests that if investors are looking for a story to latch onto, emerging markets are the ones to watch.
But of course, this depends on markets coming through the current turmoil relatively unscathed. A drop in US interest rates seems increasingly likely next week, which would no doubt boost equities – though with many investors now hoping for at least a half-point cut, there’s lots of room for disappointment. And as the dreadful US August jobs data shows, the American economy is already in trouble. That’s bad news for an Asia which is still heavily dependent on exports.
Meanwhile, the full consequences of the credit crunch have yet to unfold. The spread of three-month Libor (London inter-bank overnight rate) above the Bank of England’s target base rate hit a 20-year high yesterday. If banks are forced to take too much debt back onto their balance sheets, it will hit their ability to lend money elsewhere. The prices of buy-to-let mortgages are already rising significantly, seriously threatening the main group of buyers holding up the bottom end of the British housing market.
That said, our own James Ferguson believes that equities – or at least some of them – look good value just now; you can read more of his thoughts on which stocks are worth buying now, in our most recent RoundTable cover on the credit crunch – subscribers can read the piece here: Why the stockmarket still isn’t safe.
London’s FTSE 100 index of leading shares gave up earlier gains to end Monday 57 points lower, at 6,134, as a weak start on Wall Street knocked investor sentiment. Primark owner Associated British Foods was amongst the day’s biggest fallers after it announced in-line results but warned that full-year profits could be hit by rising costs. For a full market report, see: London market close.
On the Continent, the Paris CAC-40 tracked Wall Street lower, closing down 43 points at 5,386. And in Frankfurt, the DAX-30 was 61 points lower, at 7,375.
Across the Atlantic, US stocks closed a volatile day’s trading mixed. The Dow Jones was up 14 points to 13,127 with McDonald’s leading the gainers. However, the tech-rich Nasdaq was down 6 points at 2,559, and the S&P 500 was 1 point lower, at 1,451.
In Asia, the Nikkei rallied 112 points to end the day at 15,877. But a late sell-off saw the Hang Seng trading 144 points lower, at 23,854, near the close.
Crude oil was trading at $77.63 this morning and Brent spot had fallen to $75.83.
Spot gold was steady at $703.30 this morning, having jumped $3 yesterday. And silver was little-changed at $12.51.
Turning to currencies, concerns that America’s subprime mortgage troubles could spread to the UK (see above) saw sterling fall against the dollar (last trading at 2.0265), the euro (last at 1.4690) and the yen (last trading at 230.1). And the dollar was at 0.7247 against the euro and 113.48 against the Japanese yen.
And in London this morning, clothing retailer Next announced an expectation-beating 14% rise in H1 profit. Strong sales for its mail order Next Directory service plus effective cost controls offset flat results for Next Retail. However, the company is ‘very cautious’ as to the outlook for catalogue sales as consumers become increasingly reluctant to spend on credit. Next shares were down by as much as 1% in early trade.