The dark days of March are returning to haunt markets as oil prices surge willy nilly, US unemployment goes the same way, US investment banks report huge losses and raise billions in capital, and inflation stalks the world’s economies.
Sound melodramatic? Perhaps, but that’s a summation of trading and news in world markets Friday night and yesterday, while we were long weekending and celebrating Lizzie’s birthday.
There are many who would say it’s just a blip as the US recovers, there are others who are not so certain: among those are the boffins at the European Central Bank who overnight said (in the bank’s latest financial stability report) that the outlook for the continent’s financial sector remains “highly uncertain” and the system is now more at risk than six months ago.
“Looking forward, the euro area financial stability outlook is highly uncertain and a lot will depend on how economic conditions – especially in the US housing market – develop and how banks respond to an operating environment which is much more challenging, ” the ECB said.
And try the chaps at the Bank of International Settlements: the so-called central bankers’ central bank. In its latest quarterly financial report, released yesterday, the BIS said that strains in the interbank markets, where the credit crunch started and still remains, are not going away.
“This appeared to imply expectations that interbank strains were likely to remain severe well into the future. With market rumors proliferating about imminent liquidity problems in one or more large investment banks, banks became increasingly wary of lending to others.”
That’s why Lehman Bros, the fourth and smallest of America’s big investment banks, rushed out its second quarter financial report 10 days early, along with news of a big capital raising. It was designed to give the market more than enough proof that it has the strength and liquidity to withstand a run and not follow Bear Stearns down the tubes.
So investors in the US learned well before trading opened that Lehman had lost $US2.8 billion in the quarter because of write downs of $3.7 billion and multi million dollar losses on hedges gone wrong. It raised $US6 billion in the course of Monday, which takes its total fund raising since the crunch started to a worrying $US14 billion.
Lehman revealed that it has boosted its cash holdings and sold off a net $US60 billion of assets and gotten rid of borrowings to drop its leverage from 32 to a still exotic 25 times capital. (Commercial banks are around 12 times). Although high, it means Lehman Bros will earn considerably less profits in the next year or so. It won’t be alone. All investment banks and even some hedge funds and private equity groups are quietly selling off assets to reduce their leverage.
In London, the Royal Bank of Scotland got 95% of the $US12 billion in new capital it was looking for from shareholders and declared the raising a success: now it has to sell off its train leasing business and its insurance arm for around $US8 billion more to completely reassure investors.
And reports surfaced in the London media that the huge Barclays Bank is looking for up to $US12 billion in fresh capital as it struggles to maintain its capital ratios in the face of declining margins, revenues and the tanking UK housing and property markets.
The downgrading of credit ratings at two large US bond insurers, MBIA and Ambac, will mean more write-downs for investment banks and investors around the world. Around $US13 billion of bonds issued by Australian groups will be affected.
UBS, Citigroup, Merrill Lynch, Goldman Sachs and host of financial groups in the US and in Europe and Asia face write-downs because the triple A ratings ‘rented’ from the insurers no longer applies: the higher interest rates on the lower rated bonds will mean capital losses.
Those optimists on Wall Street looking to be saved by the recovering US economy later this year got a double blow late last week with the sharp rise in US unemployment in May and the surge in world oil prices to more than $US138 a barrel. The US dollar fell heavily, but recovered Monday, as did oil which dropped just over $US4 a barrel. Gold and copper were also weaker, as was wheat. Corn rose to a record in Chicago because of heavy rains in the Midwest.
Between them the comments from the ECB about a possible rate rise next month and the US unemployment figures, plus some cynical comments about bombing Iran’s nuclear facilities from an Israeli minister who wants to replace the country’s embattled Prime Minister, undid the message the US Fed was sending that it wanted a firm dollar and no more rate cuts.
The dollar is now weak again (and ours dropped 1 cent overnight to around 94.90 US this morning), but there will be no cut in US rates, despite the worrying rise in the US unemployment rate and oil jumping 16% last week (now 12% after last night’s fall).
There is just nowhere to turn for policymakers and investors at the moment. And don’t mention inflation.
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