Last night US stock market tumbled by another 5.7%; making the index lose 15% this month, a record in 70 years since market crash in 1929. Even Bernanke’s hint on deep rate cut failed to revive the market amid worsening credit market crisis.
Let’s see the key market indicators:
- 3M US Dollar LIBOR stayed at 4.32%, highest level since Dec 2007, still much higher than Sep 12’s 2.82%
- TED Spread remained at 356bp , slightly retreated from 387bp on Friday, but still much higher than Sep 9’s 115bp
- 3M US Dollar CD 5.32%, retreated a bit from last Wednesday high of 5.51%; but still much higher than Sep 15’s 2.8%;
- VIX Index reached 53.58%, all time high;
What did FED and other governments did in the past few days?
- FED announced increase of its term facility from $450bn to $900bn;
- FED announced to buy commercial paper directly from the money market soon;
- FED did a ‘stealth rate cut’ of 75bp in its recent lending to commerical banks;
- FED is considering direct lending to corporates;
- Bernanke hinted in yesterday’s speech that a deep rate cut is probably imminent;
- Australia ’s central bank did surprise rate cut of 100bp from 7% to 6% yesterday;
- German government spent 50bn euro in salvaging Hypo Real State after a failed private sector salvage;
- Germany , Ireland, and other governments said to guarantee all deposits in banks;
- Market suspected Iceland government is on the verge of bankrupt.
From all these info I believe I have seen some sign of easing in the credit crisis. I believe FED and treasury have the means to stablize the market by flooding the market with liquidity and replacing the function of banks (which takes time though); Paulson’s plan will start working in a few weeks time as well. However, when credit market seizure finally eases a month from now ( Assuming this is not the end of the world ), the severe damage of the 2 months’ credit market seizure has been done to the economy. The US recession in the next 2 quarters should be deeper than originally expected. In addition, FED’s action will not reverse the powerful force of accelerated ‘global deleveraging’ (when all things settle down, global leverage will be much lower); financial market recovery will take a much longer time than originally expected.
My conclusion: short-term buying opportunity in expectation of a rebound in Hong Kong market on China’s fiscal and monetary policy easing ; long-term investors should be more patient and wait for the real bottom to come in the next few months.
