US Recession Leaves European Markets Gloomy
The financial markets once again suffered from a sluggish week following news that the US economy is slipping into recession. Investors were also left anxious due to the blow rocketing commodity prices will have and there were also added fears among investors as financial sector did not come up with encouraging results. There was in particular greater chaos in the credit markets owing to unwinding positions taken by investors in structured products added to this was the $2.8bn write-down revealed by Credit Suisse for investments backed by assets. Credit spreads expanded to their highest levels in Europe and the US but remained stable as the week ended. A still more worrying trend about the US economy was that of slipping into more recession of a regional indicator of manufacturing activity.
Worries about rising inflation were fueled by a strong US consumer price data and a sharp rise in commodities in which oil, gold and platinum reached to their record levels. North American economist at Merrill Lynch David Rosenberg expressed that economic recession is no longer the point of debate it is about how hard the blow will be. The situation got further gloomy when the Federal Reserve announced cut in its growth estimates which triggered the futures market to increase odds of a 50 basis point cut in US rates for March to 94%. Although the trend in the credit market was gloomy but in the equity markets the scene was quite stable all through the week. However speculators say that this disparity between the two markets will not last long. Stocks in Europe were able to record steady growth, the Eurofirst 300 Index of FTSE gained by 0.8% for the week and the London FTSE 100 rose by 1.7%.
European government bonds suffered instability in the week owing to investor’s reaction to the data of US economy as well as the expanding credit spreads. Economist at UBS, Larry Hatheway was of the opinion that he found weak trends in bond markets for some weeks and also said that sustained higher returns are hard to justify. The economist further added that global and US economic growth will remain slow for a considerable period which in turn will maintain low real rates and would also help in taming inflation stress. Larry Hatheway also said that short rate returns of US seem promising in the light of Fed policy results and the rate expectations in Europe will not be relaxed by the central banks.
The return on the two-year note increased by 6bp and stood at 1.96% for the week but the ten year Treasury note dropped by 3bp and came to 3.74%. The government bond return curve in Europe dropped greatly; it fell to 84bp from 67bp. reduced expectations from investors in the cut of eurozone interest rates was the reason cited by analysts. Comments by the president of the European Central Bank, Jean-Claude Trichet also affected the drop. The ECB is likely to cut down interest rates as it finds more evidence of rising economic slowdown.
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