Week ending 14th March 2008   

The US Federal reserve announced yet another “liquidity package,” this time for $200BN and called it TSLF (term securities lending facility.) It allows troubled banks to borrow Treasury Securities from the Fed for 28 days, but the “borrowing” must be more than fully collateralised, itself the problem of the many shaky banks’ in the first place. The US trade deficit for January came in at a lower level than expected, at $58.2BN, whilst February advance retail sales disappointed at -0.6%, mainly due to falling auto sales. The one “cheery” piece of economic data was that somehow inflation (as measured by the February CPI number) actually remained unchanged at 4% annualised. The announcement of the Fed liquidity package saw the Dow soar by 416 points, its largest one day gain in years, only for it to plummet on Friday, when the Bear Stearns news was released. By the weeks end the Dow had managed a 0.5% gain, whilst the S&P 500 fell by 0.4% and the Nasdaq remained level.

The Euro-Zone CPI for February came in slightly higher than expected, at 3.3%, an all time high. Meanwhile UK producer prices rose in February at the fastest annual pace since 1991, with raw material costs rising at an annualised 19.4%, the most since records began in 1986.The FTSE100 index lost 1.2%, whilst the French CAC and the German DAX gave up 0.6% and 1% respectively.

Out East, Japanese Q407 GDP was higher than expected at 3.5% annualised, whilst in China, retail sales are climbing at 20.2%, boosted by the fastest inflation in 11 years and by a 17% increase in urban incomes over the past year. Meanwhile, in New Zealand, house sales dropped by 32% last month as record high interest rates deterred buyers. The Nikkei fell heavily for a second consecutive week, this week by 41/4% with the Hang Seng lower by 1.2%.

On the currency front, the $US index fell by a significant 1.9% to 71.67, with the main beneficiaries being the Yen, higher by 2.6% and the Euro, up by 2.1%. German 10 year bond yields declined by 5.5bps, ending the week at 3.73% whilst Japanese JGB yields fell by 9bps to 1.26%. US 5 and 10 year Treasury yields fell by a further 3.7%% and 3.4% respectively, ending the week at 2.34% and 3.4%. Year to date they have now fallen by 32% and 15%.

Within the Commodities Complex the crude oil price touched $110 a barrel before ending the week at $109, higher by 3.4% whilst the price of Gold ploughed through the psychologically important $1000 level, before ending the week at $999oz.

Next week sees the latest PPI and industrial production numbers from the US, together with the February housing starts, whilst the UK and the Euro-Zone release employment data. The big event, however, in the Easter holiday shortened trading week, is the FOMC announcement on US interest rates, where the expectation is for a further cut of up to 1%.

Bear Stearns, the venerable 85 year old “Big 5” Wall St investment bank, whose hedge funds were the “awareness catalyst” for the debt problems last summer, announced its insolvency on Friday, by turning to the US Federal Reserve (through JP Morgan) for a bail out, just 48 hours after the company’s CEO, Alan Schwartz, said that liquidity was fine. Bear’s stock price has lost 84% since its 2007 high. Who’s next?

“Debt is the worst poverty”

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