Tuesday 24th February 2009

Global Stock Markets take fright following the sharp decline ….

… on Wall street yesterday afternoon. New York stocks fell to their lowest level for more than eleven years last night amid fears that the United States, the world’s largest economy, is slipping into a far deeper recession than had been thought. The DJIA fell by a massive 3.5% on the day to just above 7114, its lowest level for nearly 12-years. Both investors and traders were concerned that continued losses at major US Banks on the back of an ever weakening property market would compel the authorities to force through some degree of nationalisation. Asian markets were quick to follow the downward trend when they opened for trade on Tuesday morning. Japan’s Nikkei 225 Stock Average slid toward the lowest close in 26 years while shares in Hong Kong fell more than 4 per cent. The outlook for Japan is deemed little better than in the US and hence little support will be seen here in the short term. In fact, the Yen had an additional burden to bear following the publication of a Goldman Sachs paper entitled ‘The Top 10 Reasons to buy USD/YEN’ which didn’t make good reading for the currency.

Elsewhere, more of the same really with lots of talk about the next steps in Captain Darling’s cunning plan to extricate the UK from the current Global mess. Moves are afoot by Lloyds and RBS to replace the current very expensive preference share based funding (due to cost Lloyds alone £480 million per year in interest) with a less onerous package in return for which the Banks concerned will promise to lend lots and lots of freed up cash in mortgages and corporate loans. Very good in theory. More to come during the week no doubt. Today we get a small £950 million DMO auction of the 2037 Gilt so watch for the results later this morning - no problems anticipated today though.

In Europe, the ECB are at a bit of a watershed. For some time, the Central Bank have religiously followed the old BUBA doctrine of monetary policy underpinned by the heavy German/French influence during debate. This, with nearly all other Central Banks around the globe adopted a cut, cut and cut again regime. Times are changing in the Eurozone however, with a much more dovish approach demanded by an increasing number of board members. CDS levels, the Eastern European banking crisis and a sharp deterioration in member states’ industrial production figures have caused considerable domestic unease and the board members can see the writing on the wall. The next ECB get together in March could be a very interesting affair with an anticipated 10 out of the 16 voters now expected to argue for a slashing of official interest rates. One of several very strong arguments for selling the Euro. Today the main data event is the release of the German IFO number. Following the strong ZEW from earlier in the month, good numbers are anticipated - this however argues for a much greater degree of risk on the disappointment side and a corresponding risk to the Euro.

The US will be busy this afternoon/evening with Bernanke speaking to the Senate Banking Committee at the Federal Reserve Chairman’s semi-annual testimony on policy. He will undoubtedly reinforce the view that rates will stay low for some time yet but more interest will be his response to questions on the current state of US Banks and specific details on the ‘stress testing’ that certain financial institutions will have to undergo in the coming weeks. We also get the first of this week’s 3 Treasury auctions with $40 billion of 2-year notes up for grabs. The results won’t be announced until after the UK closes so reaction to any surprises will be down to the Far East first of all. In the early hours of our tomorrow morning, President Obama will address the Joint House of the US Congress. The world will be banking on more of the ‘beginning of the end’ rhetoric and will be extremely disappointed if he is anything less than positive.

Today’s Data & Events:

09.00 gmt Germany IFO business sentiment/expectations & curr conditions

09.30 gmt UK total business invest/BBA loans for house purchases

10.00 gmt EU industrial new orders

11.00 gmt UK CBI quarterly distributive trade survey

15.00 gmt US Richmond Fed manufacturing index

15.00 gmt US conference board consumer confidence

15.00 gmt US Bernanke testimony

15.00 gmt US house price index/purchase

16.30 gmt US Fed member Fischer speaks on the current fin crisis

18.00 gmt US Treasury sells $40 billion 2-year notes

02.00 gmt tomorrow US President Obama addresses Congress

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