FYI | Jul 21 2008
By Chris Shaw
July is usually one of the better months for the Australian equity market but 2008 is clearly an exception so far as the S&P/ASX200 has fallen around 6% in the first half of the month. Asian stockmarkets have been similarly weak but while the US market had been following the same trend and fallen to re-test March lows a strong rally last week has pushed US shares slightly into positive territory for the month to date.
The recent falls have, as ANZ Bank notes, coincided with volatility again rising to levels approaching those in March when stocks fell sharply, meaning any rally must for now be treated suspiciously and not as a sign the worst of the current financial crisis is behind us.
Similarly the bank notes volatility levels in foreign exchange markets are also continuing to trend higher, as is the US bond market. This increase in volatility is flowing through into higher credit default swap (CDS) spreads for US brokers and lenders, meaning investors are wanting more of a cut to compensate for questions and concerns with respect to the credit quality of firms borrowing money.
In contrast ANZ notes CDS spreads for the European banks and major US corporates have stayed fairly stable, meaning for now the uncertainty in the US remains largely confined to the financial and housing sectors of the market. Such an increase in spreads makes sense as to date the financial crisis has seen losses of more than US$400 billion reported by financial institutions, the largest coming from US-based banks with Merrill Lynch and Citigroup leading the way.
In Australia CDS spreads are rising slightly on the bank’s numbers, which is not unexpected given the greater concerns over the country’s economic outlook of late. Interbank spreads have also risen slightly in recent weeks in both Australia and the US, while ANZ notes they have fallen slightly in both the EU and the UK markets.
While equities in Australia have done it tough as the market attempts to factor in scope for an economic slowdown there is one piece of good news in that the International Monetary Fund (IMF) has upgrades its estimates for global economic growth.
ANZ points out the IMF’s forecasts this month now call for world economic growth of 4.1% this year and 3.9% in 2009, up from 3.7% and 3.8% respectively and driven largely by expectations of better than previously anticipated growth in the US this year.
While the IMF’s new forecasts mean the world economy in general and the US in particular will slow next year the forecast of 1.3% growth in the US this year and 0.8% next year is significantly better than its previous estimates of 0.5% and 0.6% respectively.
It also means the US should avoid a deep recession, which should prove supportive for economic growth generally and may well support equities in that market and in the Australian and global markets as well if earnings prove to be more resilient than some market expectations.
