The Federal Reserve announced on Tuesday that they would inject $200 billion into treasuries to try and instill stability into financial markets. They would allow banks and primary dealers to also use mortgage bonds as surety. Further, the Federal Reserve joined forces with the European Central Bank and the Swiss National Bank to increase swap lines. This allows the banks to borrow dollars and lend them to their own banks.
But the overall reaction of the market was muted with Citigroup, Goldman Sachs and others saying that the Federal Reserve’s plan may fail to ease the fundamental problems in the credit markets.
Consumer spending accounts for more than two-thirds of US economic activity. The retail sales numbers were being closely watched as a gauge of the US economy. The Commerce Department said sales unexpectedly fell in February, dropping 0.6%. Economists had expected a gain of 0.2%.
Carlyle Capital has failed to agree on a deal with lenders. The mortgage bond fund has defaulted on $16.6 billion of debt.
Standard and Poor’s said that an end to the write downs related to US sub prime was in sight. It said that the bulk of the sub prime pill had been swallowed.
China saw inflation accelerate to the highest pace in 11 years to 8.7% in February. The result was due to the worst snowstorms in decades which saw a disruption to good supplies. This puts pressure on the central banks to raise interest rates.
Exporters were sold off in Japan this week as the greenback traded at a 12 year low against the yen.
In Australia, Westpac-Melbourne Institute Consumer Sentiment fell 9.1% in March which was impacted by rising interest rates. The jobs market however has remained strong. The market was expecting 15000 jobs to be added in February and instead we saw 36700 new jobs added. The unemployment rate went down from 4.1% to 4.0% to a fresh new 33 year low.
The Euro has now hit 11 record highs in the last 13 sessions. Looking at fundamentals and Euro zone data it continues to be positive. Euro zone industrial production rose 0.9% in January. In France, inflation picked up due to higher food prices. In Germany, investor sentiment picked up with many expecting global growth to pick up in 2008.
With the US economy still showing no signs of improvement, the US currency has continued its decline. This has resulted in record commodity prices. Gold has hit $1000 US an ounce, oil continues on its record path and the London Metal Exchange has seen a new record. Market watchers are seeing commodities rise even further given the bearish outlook of the greenback. Until the US economy shows signs of recovery, commodities such as oil, wheat, soybeans, silver, gold, base metals as well as non-US currencies will continue to outperform. Gold is up 55% in the past 52 weeks while oil is up 90%. This is compared to a flat performance from the Dow Jones Industrial Average.
Head of Fundamental Analysis
HUBB Financial Group