This week in the markets

By Neil Massie, Friday 15 August

More than a year after the credit crunch began, it still dominates global stockmarket fortunes.  After a few weeks’ respite, the market took a fresh aversion to the financials sector in the face of a new wave of asset write-downs.  Selling pressure has seen the sector give up some of its recent gains and lead world indices lower, although a lower oil price as the week drew to a close provided some relief.

Following RBS reporting the UK’s third-biggest banking loss in history last week, US banks JP Morgan Chase and Wachovia and Europe’s mighty UBS also announced disappointing results borne out of their ongoing exposure to sub-prime assets.  Having seen its wealth management business tainted by its investment bank exposure to sub-prime, UBS has decided to separate the two units, hoping to show some clear distance between them and stem the outflow of client money.  Markets took little comfort from this proposal and the shares have continued to slide.

Amidst the ongoing write-downs, investors are far from positive on the health of the banking sector.  A survey by Greenwich Associates reported that 60% of US and European institutional investors expect another big financial firm to collapse within the next six months.  A further 15% think that collapse will come within the next year.  Northern Rock and Bear Stearns may not be the only headline casualties.

Compounding the problems of the sector, banks must now face up to the consequences of the credit crunch morphing into wider economic malaise, with the implications that has for lending to even more creditworthy customers. 

This week, the Bank of England admitted that the UK could slip into recession.  “I think, with broadly flat output, it’s bound to be the case that there is a possibility of a quarter or two of negative growth, “ said Meryvn King, Governor of the Bank of England.  Mr King’s comments came alongside the publication of figures showing inflation at 4.4%, more than double the bank’s target rate.  A “difficult and painful adjustment” is expected to bring the rate back towards the 2% target over the next two years.  Faced with these downbeat economic prospects, sterling weakened against both the dollar and the euro.

Matters seem no better across the Pond and US markets have been troubled by their own inflation concerns.  At 5.6%, US inflation is now at its highest level since 1991.  The announcement that foreclosures on US homes increased 55% year-on-year in July highlights the dire state of the housing market and the difficulties still to be overcome in that economy. 

However, there may be some light at the end of the tunnel if you believe Alan Greenspan.  The former Federal Reserve Chairman thinks the US housing market may bottom out in the first half of 2009.  Since the US housing market downturn led the equity market downturn by about a year, any sign of improvement in this crucial sector may signal better times ahead for the economy and, ultimately, stockmarket investors.

The value of investments and the income from them can go down as well as up. For investments in overseas markets, changes in currency exchange rates may affect the value of an investment. Reference to specific securities should not be construed as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity.