The week started off on a somber note as analysts’ downgrades of several major banks and credit card issuers, including Wachovia and American Express, to a sell rating pushed global equity markets lower. The S&P fell 1.9% while the Dow and FTSE declined 0.9% and 0.05% respectively. However, the worse was yet to come as a bleak reading of the US service sector followed by cautionary rhetoric by the Federal Reserve fuelled recessionary fears as the S&P plunged 3.2%, while other global indices followed suit. The bearish sentiment continued across the week as financial stocks languished with the Dow dropping 4.4% from the earlier week,
its biggest weekly decline since March 2003.
With regulators nervous about lax lending standards, the wave of risk aversion is spreading across the spectrum of US banking industry with small lenders beginning to feel the squeeze of credit crunch. The Federal Reserve’s survey of senior bank loan officer’s survey for January offered the hardest evidence that the credit crunch may be spreading beyond real estate loans. The survey found that 80% of U.S. banks tightened terms on commercial real estate loans during the period, up from 50% in the previous month. On the consumer side, about 55% of banks have tightened liquidity standards for mortgages while 60% have done so on home equity
lines. The survey showed a marginal tightening in credit card lending standards (32.1% from 26% previously).
On the brighter side, the US Congress finally approved a USD 168 bn fiscal stimulus bill thereby
complementing the Fed’s endeavor to stave off a recession. The bill is expected to benefit around 130 mn U.S. households, including Social Security and military veterans, who would be receiving tax rebates this spring. Meanwhile, there remains the odd silver lining as liquidity conditions in the short-term money market continued to improve with the Fed having announces two more TAF auctions, scheduled Feb 11th and 25th.
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