Markets
Spectacular finish for the FTSE100 today as it closed 8.8% higher than yesterday, and posting a record 1 day move.
Globally, stocks surged as the US bailout plan was announced (with further details due next week)
Comment: Confidence to financial institutions have been restored, but the liquidity boosting measures performed in sync by central banks worldwide this week, bear some resemblance to the post Sep-11 measures which fuelled this crisis to begin with.
So, how near are we to the end of this crisis?
Long period of rapid growth, low inflation, low interest rates and macro economic stability bred complacency and increased willingness to take risk.
It seems like an unwinding of excesses may be required to undo the key elements that led to this crisis.
Checklist:
1) Fall of inflated asset prices back to a sustainable level
2) Deleveraging of the private sector
3) Recognition of resulting financial losses
4) Recapitalisation of the financial system
In 2), we should see large buyout deals breaking, and sectors which are traditionally over-geared underperforming as liquidity continues to be a rare commodity
This week, large and highly geared investment banks came under pressure as there was a crash of confidence that they will be able to meet regulatory demands on their capital. They were saved by the Fed's proposal to create a giant government sponsored vehicle to take on toxic assets and ban on short selling.
However, we might soon find the speculators at the door steps of Transport, Autos, Builders, Real Estate...
Other Scenarios
A) Over a longer time frame, much of the flow of funds from the developed world into emerging equities and commodity assets is likely to come home, and the underperformance of emerging versus developed equities, energy, materials and technology, all look likely in a liquidation environment.
Eric Tan, London
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