The Week Ahead

Last week, world stock markets crumbled under the relentless barrage of bad news. Markets were left staring into the abyss as the global sell off continues. All eyes were on the wider S&P 500, which unlike the Dow Jones, managed to avoid breaching the lows of 2008. There is a huge fear that a technical breach of this level could result in a cascade of selling. After all, what is there left for world governments to do? They have already started printing money, and some like the UK government are taking on record levels of debt.

Investors were evidently purging any potential risk in their portfolio, and turning to the perceived safe haven of gold, which touched the underside of $1,000 on Friday.

Sterling was largely unmoved by the announcement that national debt is set to rise to 47.8% of GDP, the highest level since the 1970s. More worrying were the reports which estimated that the addition of the part nationalised banks to the government’s accounts, could see the debt to GDP ratio shoot up to 100%. Although this figure is alarming, it has largely been priced in by market participants. Businesses and individuals have been earning less money, and as a consequence, tax receipts have plummeted. At the same time there are increasing demands on the state such as the rising unemployment benefit claims. Still, the UK economy isn’t bankrupt yet.... Credit default swaps show that the risk of the UK defaulting on its debt has shot up over the last year, but even so these risk levels are still below troubled economies such as Ireland, Spain and Greece. It remains to be seen if the chance of further bank bailouts have been fully priced in yet. That is of course, assuming that the government could afford to nationalise a bank like HSBC if it wanted to. After the various collapses over the last year, HSBC is actually now one of the largest banks in the world. HSBC fell 9% on the week on speculation that it may have to raise more than $15bn to cover write downs and exposure to Eastern Europe. Oil and Financials, the FTSE’s two biggest sectors, pulled the benchmark index down while other sectors fared little better. Oil prices are going nowhere, while the outlook for the global economy remains bleak, and the financial sector is still hemorrhaging bad news.There was little to cheer from the US after yet more economic data caused analysts to utter the familiar words "record" and "low". Housing starts hit their lowest level since records began in 1959, and industrial production dropped 10% below the same period last year.

A revealing Washington Post article showed just how efficient markets can be sometimes. The article outlines the lead up to the Geithner announcement, and reveals that the big stimulus plan was rehashed at the last minute, leaving Geithner little choice but to go on air and offer vague outlines. At every stage of the crisis, time appears to be a luxury that officials just don’t have. They have to tread carefully between trying to do the right thing, and just trying anything to stop the financial world collapsing. In the US, Automakers GM and Chryslers are still battling to avoid oblivion. The US Automaker industry is hanging by a thread. Further support is required to turn the sector back around, but this is far from being a dead certificate. Legacy costs from benefit support are now crippling the likes of the GM. It is ironic that the great US economy is in danger of losing a key industry, in part due to lavish benefits negotiated for union workers.

It is also worth noting that like many firms across the world that have gone to the wall, such as Woolworths in the UK, US Automakers were in trouble before the crisis broke. This global recession, like all recessions is exposing the weak businesses for what they really are. It remains to be seen if the remaining companies have enough strength to carry the world economy through this crisis.

The coming week’s highlights include Ben Bernanke testifying on Tuesday and Wednesday. US New home sales are released on Wednesday and existing home sales on Thursday. With no sign of an end to the housing slump in sight yet and so much riding on the market price of mortgage backed securities, these announcements will be followed with keen interest next week.

Gold has hit the headlines after breaching the $1,000 mark for the first time since last March. When this happened last time, the price pushed around 3% higher, before reversing back over the rest of the year. If the S&P 500 can manage to hold above the 752 level as it did on Friday, Gold’s onward march may be stifled in the short term.

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