The week went from renewed confidence after the US Federal Reserve cut discount rates by 0.5% to renewed worrying about the still-unfolding US sub-prime mortgage saga.
The 0.5% Fed cut makes it easier for banks to buy money, which restored short term confidence to markets and alleviated worries about the difficulties larger investors are facing in securing loans in the wholesale market. But by Tuesday the positive effect had largely worn off and the focus was back on the US sub-prime mess.
Federal officials also tried to reassure investors during the week, with Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson and Senate Banking Committee Chairman Chris Dodd discussing the recent troubles in a closed door meeting. Senator Dodd later reported that Chairman Bernanke assured him that the central banks would use “all available tools” to calm financial markets. This was taken by the markets as an indication that the official interest rate would be cut at the next meeting in September.
Bank of America announced plans to invest $2 billion into Countrywide Financial. While this was taken as a positive for Countrywide Financial it was also viewed as a bailout package. An announcement by Countrywide CEO that the housing slump could turn into a recession was not reassuring to investors.
TD Ameritrade said that it was looking to merge with other online brokers, including E*Trade Financial.
China raised lending rates rather than deposit rates in an attempt to slow down the economy and temper share market performance. As of this week, the hike hasn’t dampened share market enthusiasm, with China’s benchmark Shanghai Composite Index posting its third consecutive record day on Thursday.
The Bank of Japan kept official interest rates unchanged at 0.5% for the sixth consecutive month. The move was expected given the volatility in global markets.
The Australian market was driven by strong earnings, most notably from BHP Billiton, QBE insurance and Caltex. The Australian share market gained 8% for the week on the back of strong domestic earnings and a positive outlook for company profits.
BHP Billiton recorded a record profit of 19% in second-half earnings, with annual profit at a record 28% (US$13.42 billion). Forecasts are also good, with strong volume growth in petroleum and base metals predicted. In response, trading in London was bullish with BHP shares trading up 4.9%.
Reassured by the US Federal Reserve discount rate cut, the financial sector and the overall market stabilized this week and regained some ground. Most market-watchers agree that the Fed cut is a Bandaid solution, however, and that volatility will resume.
Financial stocks that had been oversold saw renewed buying, driving up prices for most of the week. Miners also did well after the world’s largest diversified miner, BHP Billiton, announced another record FY result and a bullish outlook going forward.
What’s the outlook on volatility? While confidence has been restored in the short term, the US sub-prime mortgage problem has yet to play out. Until the full extent of the problem is made transparent, the market will continue to second-guess what is going to happen next.
Head of Fundamental Analysis
HUBB Financial Group