Market Commentary - December 2008

Confronted with a deluge of negative economic data, central banks and governments continued to use every weapon in their arsenal to mitigate the impacts of the slowdown.

Global business confidence has plummeted to new lows as sentiment has declined sharply in both manufacturing and services sectors.

By contrast, latest consumer confidence data has shown signs of stabilization, albeit at very weak levels. However, business confidence tends to lead consumer confidence. Thus consumers may become more pessimistic before the cycle turns.

The onus is still on policymakers to act aggressively to turn the economic cycle. In the US, the Federal Reserve further expanded its balance sheet to a staggering $2.8 trillion by buying $700 billion of mortgage and asset backed securities in order to stimulate consumer lending.

In Europe, the ECB abandoned its inflation targeting mandate and put through a 50 bps cut that was vastly surpassed by the Bank of England’s unprecedented 150 bps cut. Finally in Asia, the inability of Prime Minister Taro Aso’s new Cabinet to force through a second stimulus plan stood in marked contrast to the Chinese government’s announcement of a $600 billion stimulus plan to keep economic growth above 5% over the next two years.

There will naturally be a time lag before these policies have their desired effect. Nevertheless, it is hoped that the wave of liquidity being unleashed by declining interest rates and government borrowing should be enough to offset the fear of deflation.

On the economic front, US job losses far exceeded expectations in November as employers cut 533,000 workers from their payrolls and another 199,000 job losses were uncovered on revision. Relative to the data now on record, the November payroll loss is the worst single month since December 1974, in what currently stands as the deepest recession in post World War II history.

The RBA last week announced another 1% reduction to the cash rate target taking the cumulative RBA easing since early September to 3%. This is the most aggressive series of official rate cuts since the 1990-91 recession.

Australian GDP growth was barely positive (0.1%) in the September quarter.

The G20 leaders met during the month to discuss the global financial crisis, agreeing on the need for fiscal stimulus, lower interest rates and reform of the financial regulatory system, however the communiqué didn’t provide anything concrete by way of a formal coordinated approach.

Credit continued to struggle in November in spite of the global banking system now effectively being underwritten by numerous underlying governments. This was driven by poor economic data that has shown no signs of bottoming, the inevitable increase in default rates and global de-leveraging and client redemptions ensuring selling pressure on bonds is overriding any buyers.

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