FYI | Sep 24 2007
By Chris Shaw
If investors had only recently eturned from a holiday on a deserted island for the past three months they could be forgiven for asking what others were talking about with respect to the recent sub-prime led crisis in financial markets.
As TD Securities global strategist Stephen Koukoulas points out, US equity markets are near all-time highs, commodities prices are strong and credit spreads and risky assets have rallied as all markets have recovered in an extraordinary fashion since the US Federal Reserve cut interest rates last week.
The rally is partly justified as a previously feared US recession looks highly unlikely in Koukoulas’s view, particularly given GDP growth in the current half is likely to be something above 2.0%, even when allowing for the ongoing weakness in the housing market and some fallout from the sub-prime crisis.
Supporting this view is the fact US unemployment remains quite low, while inflation is in line with the targets set by the Federal Reserve. Strong global equity and commodity markets also suggest there is little risk of the US sliding into recession, especially as corporate profits are strong.
Looking forward Koukoulas sees scope for one more 0.25% cut in the Fed funds rate, as additional insurance against the downside risks in the US economy and to maintain sufficient liquidity in the banking system.
But he suggests there is little reason for the official interest rate to be below 4.5% given the growth outlook, meaning any rate cut cycle is likely to be short. This means investors should be looking for eventual opportunities in the US dollar, as there remains scope for US growth to surprise on the upside.
