The Lending Crisis Deepens

Commonly referred to as the “suckers rally”, worldwide stock markets have returned to their recent down trend after a recent rally which tempted some back into the market. After a few days of rest bite, we are now seeing the first cautious statements from some of worlds largest companies, with many forecasting that the situation will get worse before its gets better.

We have seen statements from retailers, manufacturers and investment companies, all of whom have taken a similar line in their reading of the situations. The next step will be some official reductions in the expected growth of both local and worldwide economies, which could well lead to further profit downgrades and even sell recommendations. When you also consider that a vast number of recent takeovers rumours will soon disappear, as funding becomes more and more expensive, the premium in many share prices will soon evaporate.

Attempts by central banks around the world to shore up the money markets, by injecting much need liquidity, have had a short term impact but they cannot continue bailing out the markets for much longer. Sooner or later the market will find its natural level, a level which will be a reflection of the concerns of the moment.

All in all the next few months are going to be vital for both local and the world economy, although the probable slow down in economies may well reduce the likelihood of further base rate rises both in the UK and across the Atlantic. However, for many investors, both directly and indirectly exposed to the stock market, this will be little compensation with stock prices likely to be under pressure for some time to come.

Short Term Relief As US Interest Rates Cut

Worldwide stock markets have today received a welcome, although unexpected boost with news that the US Federal Reserve have reduced US base rates by 0.5% to 5.75%. In a move which was designed to both inject liquidity into the money markets, and give the economy a much need boost, stock markets have rebounded sharply from recent lows. But is the worst over?

While a move such as that experienced today is not so unusual, in the past it has often precluded more bad news which the Fed were aware of, but which was maybe not yet in the public domain. Even though the markets have good reason for this show of short term relief, the situation is far from over and there will still be further fallout.

True, there will be more readily available liquidity in the markets which may see many firms over their bad times, but some companies have already suffered beyond reasonable repair. Many of Wall Street’s larger companies have become embroiled in the situation, and the fact that many are looking to be bailed out by larger banks around the world is a marked change from their front running attitude of the past.

The stock market is a volatile and unpredictable beast at the best of times, and it has a habit of biting back just when you think you have tamed the beast. Today’s substantial buying pressure has been greatly received, but those who think the situation is now over may soon be disappointed. The central banks around the world cannot support such man-made situations forever, and there will be some form of accountability at some stage – “pay back time”.

Once the current euphoria calms, many will still wake up to the fact that the US property market is still in big trouble, personal debt has never been higher, and much of the recent stock market rise was pinned on the back of takover and merger rumours. It is highly unlikely that we will see an immediate move back to wild takeover speculation, something which may bring many more share price valuations back into line with reality.

It is essential that investor tread cautiously in what is still a difficult period for world markets.