have we seen it all?! the year of recession. rare crisis... there have been very few cases where...
TRANSCRIPT
Have we seen it all?!
The year of recession
Rare crisis...
• There have been very few cases where you've had this kind of financial disruption without a significant effect on the economy
Fed Chairman, Ben Bernanke
• ENTIRE US ECONOMY “IS IN DANGER”, CRISIS DEVELOPED OVER TIME, IN AN EXTRAORDINARY ECONOMIC PERIODUS President, George Bush
• “What you need first is to restore confidence and the main worry right now is confidence”
Head of IMF; Dominique Strauss-Kahn
Housing market
• Health of economies measured by deceleration of housing market
• Housing has immense impact on macroeconomics for several years
• In theory this slow down should have happened a while ago….but it’s a cycle
• Recessions or slowdowns
– 1973-74 , 1980-82,1990-91, 2001 (Recessions)
– 1987 and 1995 (slowdowns)
Growth of Sub-prime lending
Source: Center for Responsible Lending/Inside Mortgage Finance
Recession
Crucial Events of the Credit Crunch
USA:
• FED takes control of Fannie Mae and Freddie Mac (market initially reacts well)
• 1 week later - Lehman files for bankruptcy - no assistance from the government
• Insurance giant A.I.G. in desperate need of loans, FED decides to help.
• Merrill Lynch sells itself to Bank of America - to avoid Lehman fate.
Europe:• Fortis forced into a break-up talks, partly bought by BNP Paribas and local govt’s
• Dexia, French-Belgian lender - receives major capital injection
Market events
• EURUSD 1.23+, falling from 1.60+ (July 08)
• Oil falls to $62+ region - July: $147
• Gold down to $700+ region – July: $985 region
• Indicies fall in double-digits
Source: SaxoTrader 2
Consequences; Extreme instability
Source: Bloomberg
• Volatility shoots to extreme levels
• Cost of borrowing spikes likewise- USD 3 month LIBOR rates
Action taken to fight the crisis...
• Fed passes the long awaited $700 billion plan .
• .... injects $250 bn in return for partial ownership
• Fed cuts rates to 1.50% -- in a co-ordinated action with other central banks...
• Goverments announce guarantee of all bank deposits, e.g. Ireland, Denmark, UAE, Denmark, Austria...
• UK allocates up to 50 bn GBP for recapitalisation/share-purchase of major UK banks
• Iceland takes over Kaupthing Bank hf, 3rd lender to be taken over
Two Interesting Things
Middle East Booming….at a cost!
Middle East
• Inflation fears:
– 10% Saudi Arabia
– 11% Kuwait
– 13% Oman
– 12% UAE
– 15% Qatar
• Dollar peg previously a major discussion point, but easing now with recent USD gains
• Recent Oil falls a concern to OPEC, big reductions put in place...
Economists: e.g. Iran needs oil to be $70+
Perfect storm
Commodity High (YoY) Low (YoY) Correction % Current (27 Oct)
EURUSD 1.6000 1.2480 22% 1.2480
USDJPY 115.40 92.79 20% 92.79
Gold 1004 703 28% 725
Crude Oil 145 62 56% 62
S & P 500 1554 830 46% 830
•I will reprint John Hardy's 50% retracement numbers for indications:
Main calls
• EURUSD: previous 1.2700 and 1.2300 targets met, now 1.2000 next level – Q1 2009
• USDJPY: Down to test 90.00
• Gold: below 700 by Q1 2009
• Crude: 50-60 by Q1 2009
• S&P: Down to test our long-term minimum target of < 765.00
• Fed funds: 0.50% by Q2 2009
• ECB: 1.50% by Q2 2009
Thank you UAE!