Payback - Thursday 21st May

Payback…
Markets have decided to take a breather in the last 48hrs, just as more and more articles were being written about the longevity of the rally – must be true what they say about the new online world we live in these days, if it’s in the papers, well it’s already too late. This coincides with an admission by Fed officials (released through the minutes of their last meeting) that they do not believe the stabilisation measures they have put into place in the last few months will persist, and that some major US banks are still at risk of creating “major shock” to the economy. The major US banks (Morgan Stanley, Goldman Sachs, JP and now also Bank of America) are still trying to get out of some of the more stringent measures imposed upon them by the TARP programme. Bank of America seems to think it will be in a position to pay back $45bn the year-end. Why are they all in such a hurry? I wonder. It seems strange that the US govt isn’t slightly concerned by the ultimate desire of the major financials to be able to continue to pay themselves huge amounts in bonuses by the beginning of 2010. Would it not be more prudent to first ensure we are well and truly out of this crisis and that balance sheets and the general financial system has been resuscitated satisfactorily (which it clearly is not yet) before the TARP money is thrown back in the government’s face?

On the markets, the general return of caution and a slight slowdown in the build-up of what was dangerously becoming a “did-I–miss-the-rally-I-need-to-get-in-before-it’s-too-late” herding mentality, has resulted in muted performance across the major markets, with Asia coming off a little on the back of a lacklustre close in the US overnight (S&P -0.51%, DJIA -0.62%). Some of the strongest market rallies we’ve had in the last two months came from the Asian economies, so it is no surprise that a slight touching of the brakes has now taken place, especially in HK and China (-1.6%, -.2% respectively). Europe has fared worse, with the majors down an average of 2%. The news that the UK may lose its S&P AAA rating as its finances worsen has brought a sharp fall in the FTSE, but the real reason for the decline across the rest of Europe has been those gloomy minutes of the Fed meeting again. US futures are pointing to an equally downbeat trading session (DJIA -55pts, S&P -6.7pts).

Dollar Dive, or Sterling Slash?
The US$ sell-off is having its first shot. All the major currency rates are seeing a marked depreciation as investors possibly finally begin to understand the huge burden of the financial guarantees and packages that the US has now committed itself to and will continue to do so for many more years to come. Cable has seen a significant appreciation in the last few days especially (+8.5% in the last 30days, 3% in the last 5days) even with talk of a worsening situation in the UK – an example of the “lesser of two evils” in this case simply which leveraged economy is worse off? The US or the UK? Cable actually crashed almost 1.8% a few hours ago when the news of the possible S&P downgrade came through, but with increased talk on the extra pumping of US$s at the same time, we are now in a position where the markets and traders will have to decide which way to send the world’s (flailing) currencies. The Yen, after holding steady at around 95 as Japan’s economy continues to contract (-4% for the last quarter), has now fallen to an eight-week low but the Euro has strengthened.

Split right down the Central Bank?
Some disappointing developments on what had appeared to be a done deal for Saudi Arabia as the location of the GCC Central Bank as well as the general surrounding monetary policy and closer cooperation between the constituent nations. The UAE Central Bank came out yesterday and announced that it would be maintaining the peg to the US$ and essentially withdrawn from the GCC monetary plan. This is in addition to Kuwait having de-pegged some time ago and Oman refusing to play-ball with the single-currency plans. Whist this will not come as much of a surprise to observers painfully aware of the ongoing politics across the region, it will not do much to instil confidence amongst international investors hoping that region has matured beyond petty politics. Even more confusing, the UAE Federal National Council is to question the UAE (their own!) central bank and ministry of finance on why the UAE made these decisions? Are the phone lines here not working or have the authorities run out of credit on their pay-as-you-go-lines? How can they not be talking to one another before handing Saudi such a public slap in the face? Incredible, but more importantly, incredibly bad for the region’s reputation.