Tuesday, January 22, 2008

The global markets catch up

Today's 0.75% Fed rate cut tells us three things:
  1. The Fed despite having access to the brightest economics minds, econometricians and quants in the world has little or no idea whats going on in the US economy or will happen next.
  2. Bernanke may be very bright, but he is no Greenspan
  3. Things are thick. When you look at some of the economic data e.g. new jobs for Dec were only 18,000 compared to 200,000 in Dec 2006; gas prices at historic highs; negative equity in housing a relaity for some, then you things are not good. Furthermore, a cut like this will only have an impact if it feeds through to credit card spending; lower variable payments on borrowing (but bear in mind most mortgages are fixed)
As far as the current stock bath, these are the likely impacts should it continue for a while:
  • US: Continued negative sentiment will increase likelihood of reception from 60% to 90%
  • Japan: A virtual shadow of the US these days. When I was doing CAMELBCOM for banks a few years ago, a Nikkei level of 12,000 was a trigger for panic over the Japanese banking system given the level of cross-shareholding between Japanese banks and the rest of the economy.
  • Continental Europe: Unlike US, the level of equity participation by general population is low. Nevertheless, a slowdown in US, Japan and other markets will mean fewer exports.
  • NSE: Has zero correlation with the US/UK/Europe markets and shouldn't see any effects from their woes. Ours will only be our own if we want them.
  • Emerging markets: Of late, there has been talk of decoupling by this sector from the US economy. Not so, China/India felt the chill-factor with BSE being suspended this morning and Bank of China having to declare substantial subprime writedowns. I however expect fundamentals to do the talking for these economies.

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