A week after the Federal Reserve's hefty interest rate cut, financial market participants and officials are pointing to some hopeful signs suggesting calmer times ahead.
Finance officials around the globe Monday pointed to financial markets that are continuing to show encouraging signs of improvement, while recent remarks from major Wall Street firms have also indicated increased activity, notably in the loan market. There's evidence to back up the optimists: Corporate debt issuance has picked up smartly and the risky loan market is showing the first signs of life since the summer upheaval as underwriters market a $5 billion chunk of the loan piece needed to fund the First Data Corp. (FDC) buyout. The commercial paper market, the center of the recent market storm, is slowly, though shakily, improving. But at the same time, there are those who warn that working through the current market woes - whose origins lie in the U.S. subprime mortgage market but have spread beyond that sector - will be a lengthy affair. And they too have evidence on their side. | |
| On The Way To Normal Conditions | |
| Early Monday morning in New York, Anthony Ryan, Treasury assistant secretary for financial markets, was among those officials pointing to signs of improvement in capital markets. "We recognize the market liquidity is continuing to improve," said Ryan in a question and answer session following prepared remarks delivered at The 2nd Euromoney Inflation Linked Products conference in New York. A similar view point had come earlier in the global session from across the globe, as the Reserve Bank of Australia published its financial stability report, though the central bank was quick to warn that it is still too early to rule out further market turbulence and strained liquidity conditions. "While conditions in global markets remain tight, the past week has seen inter-bank spreads decline appreciably and some easing in funding conditions," it said. The RBA has been withdrawing liquidity from the domestic banking system over the past week, a hopeful sign of increasing confidence at the central bank as the dislocation in the short-term money market eases. The stickiness in financial markets was set off early this summer as investors became wary of risky assets after large subprime mortgage market bets went wrong. Short-term borrowing markets have been the hardest hit over the last few months, with investors largely unwilling to loan out funds for longer periods. That forced central banks across the developed world, from Australia to Japan, from the euro zone to the U.S., to add sometimes massive amounts of additional funds into their domestic markets in an effort to restore the smooth functioning. But the Fed's bold rate cuts - it lowered both the target fed funds rate and the discount rate for emergency borrowings by 50 basis points to 4.75% and 5.25%, respectively - seems to have done the trick for now, at least in terms of investor confidence. The major Wall Street brokers that reported last week were mostly upbeat that the recent market turmoil was coming to an end and capital markets were reopening for business. Last week, Goldman Sachs (GS) Chief Financial Officer David Viniar said he sees early signs of a revival in the loan sales market, adding that he is confident the global economy will stay strong and stimulate future earnings. Despite the major disturbances in the credit and mortgage markets, Goldman reported a 79% surge in fiscal third-quarter net income amid record revenue. The Fed's larger-than-expected cut in interest rates last week "certainly has left a better tone in all of the financial markets," Viniar said. "There seems to be reasonable growth worldwide." | |
| Not so fast | |
Yet conditions still remain far from normal, with the dollar benchmark three-month lending rate, the London interbank offered rate, still stuck at 5.20%, significantly above the fed funds rate that it normally tracks pretty closely. The beleaguered U.S. housing market continues to suffer, and more stress is expected in coming months as low introductory "teaser" mortgages reset to higher rates. Those concerns were highlighted by the International Monetary Fund in its latest Financial Stability Report Monday. The IMF said that the credit crisis plaguing international markets will probably be "protracted" and slow growth of the global economy. "The potential consequences of this episode should not be underestimated and the adjustment process is likely to be protracted," the IMF said. "Credit conditions may not normalize soon, and some of the practices that have developed in the structured credit markets will have to change." While the effects of financial market turbulence sparked by losses in the U.S. subprime mortgage market have so far mostly touched the U.S. and Europe, the IMF said, developing countries, namely those that have experienced rapid credit growth in recent years, could also come to suffer, and global expansion will likely slow amid credit repricing. The IMF also stressed that regulators need to change the way they supervise financial institutions, incorporating lessons learned in this first test of new, innovative financial products used to distribute credit risks. Among the potential risks the IMF said could suggest further turmoil ahead are home prices falling further as lending standards continue to tighten, and less consumer spending if the stock market were to suffer significantly. Stubbornly high short-term borrowing rates could also curb capital investment by companies, and most damaging, overall credit availability could be disrupted, the IMF said. "The chances of more severe tightening of credit conditions cannot be dismissed," said the IMF. "Such a tightening could have significant global macroeconomic consequences, with the incidence of such tightening falling most heavily on more marginally creditworthy borrowers." | |
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