Global equities seesawed across last week as investors grew jittery after the buyout of the troubled Bear Stearns at a fire-sale price by J.P.Morgan but garnered some confidence on the back of a string of positive moves by major Central Banks. The financial sector led most of the rallies throughout the week as investors hailed the Fed’s 75 bps cut in its key interest rate along with a host of broad based liquidity injection measures as a potential building block in the long term solution to the credit crisis. Stronger than expected first quarter results of investment banking giants Goldman, Lehman and Morgan Stanley also helped shore up global equities. The Dow gained 3.25% across the week while the FTSE gained 1.49%.
Citing a weakening economic outlook as well as an elevated inflation, the US Federal Reserve delivered another shot in the arm to the slowing economy as it cut the Federal funds rate as well as the discount rate by 75 bps each, thereby bringing them down to 2.25% and 2.5% respectively. Earlier in the week, Bear Stearns's sudden meltdown had forced the Fed to take the extraordinary measure of allowing securities firms to borrow from the central bank under terms normally reserved for regulated banks.
In an effort to bolster the ailing housing market, the OFHEO reduced the capital surplus that GSEs Fannie Mae and Freddie Mac must hold to 20% from 30% previously. The move is expected to provide a much-needed respite to the two hobbled GSEs as it provides up to USD 200 bn in immediate liquidity to the troubled MBS market. The Fed’s latest measures to unfreeze the credit markets appears to be working in the MBS market where yields have come off their recent highs. The difference on the yield on 30-year MBS compared with U.S. Treasurys fell to 2.74 percentage points, from a high of 3.7 on March 6th. However, upward risks remain abound as another collapse may trigger massive develeraging as investors, banks and others try to reduce their own exposure to risky markets. In what has become one of the most pervasive credit crisis, the issue no longer remains whether it will yield a recession, which seems certain, but whether the Fed’s novel efforts would help to cut the tail risk of a deeper and prolonged recession scenario.
Funding pressures unlikely to abate soon:
The Fed’s new direct lending program aimed at primary dealers coupled with a substantial 75 bps cut in its key interest rate eased funding pressures in the short term money markets over the last week. The size of the total borrowing from the Fed’s primary credit lending facility suggested broader interest amongst the securities dealers. The program drew an average of USD 13.4 bn in daily borrowing in the week ending March 19th ’08 with firms having USD 28.8 bn in loans outstanding.
The 3M USD LIBOR edged up 2.7 bps across the week to 2.606% while the 6M USD LIBOR rose 17 bps to close 2.53%. The ABCP market deteriorated for the third consecutive week with its outstanding value having dropped by USD 4.3 bn last week compared to a USD 5.7 bn dip previously.
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