Market Update – 29 Sep 2020

12 years ago today  the Dow Jones Index fell 777.68 points in a single days trading, it was until recently,  the largest point drop in history. Across Wall Street, no one could quite believe what was happening on the floor — the floor of the House of Representatives, not the New York Exchange.

It had all started two weeks earlier when Lehman Brothers, the giant US investment bank, went bust and as the lawmakers began to vote on a $700 billion rescue for other impacted  financial institutions, money managers gaped at the televisions screen carrying news that seemed unthinkable: the rescue bill was not going to pass and shortly after 1:30 p.m., the rescue was rejected.

This was the moment when global financial stress turned into a full-blown international emergency, the banking crisis.

People started to sell and they sold hard. It didn’t matter what you had — you sold. Frustration, and then panic, coursed through the markets. Investors feared the decision in Washington would imperil the financial industry, as well as the broader economy.

At the Federal Reserve and other central banks, policy makers were also anxious. Even before the vote on Capitol Hill, central bankers tried to jump-start the credit markets. They offered hundreds of billions of dollars in loans to banks around the world because banks and investors were unwilling to lend to each other. But neither the stock market nor the credit markets appeared to respond.

But while Congressional aides and lawmakers worked on the details, the credit crisis that had begun more than a year before, in the American mortgage market,  was setting off new alarms in Europe. Shortly before 6 p.m. New York time on Sunday, Belgium, the Netherlands and Luxembourg agreed to invest $16.2 billion to rescue a big bank, Fortis. A few hours later, the German government and a group of banks pledged $43 billion to save Hypo Real Estate, a commercial property lender. At 2:50 a.m., news came that the British Treasury had seized the lender Bradford & Bingley and sold the bulk of it to Banco Santander.

“We will continue to do what is necessary,” a somber Gordon Brown, the British prime minister, told reporters at 10 Downing Street in London.

It was a financial crisis like no other and you know what, today I and many others are glad it happened because if it hadn’t and Covid had come along then we would have been staring into the abyss.

But because of the changes made following the banking crisis, 12 years later the markets might be struggling as a result of Covid 19 however there isn’t a sense of panic, instead it’s a realisation that we are in the midst of an usual situation and they remain strong, volatile but strong.

Indeed after a difficult week last week,  yesterday saw the FTSE 100 step up sharply as the improving investor sentiment in Asia leaked across into European trading, we saw similar rises in Germany and France.

These rises came after the weekend reports that Chinese industrial profits had risen in August and Asian stocks should consolidate their gains although upcoming holidays  and political event risk, notably in the US, is tempering exuberance.

We can expect a volatile week for much the same reasons across global equity markets in general. At this stage, it is too soon to say that the equity correction lower, that has seen markets fall in the last couple of weeks,  has run its course given the number of variables the week ahead holds.

In the UK, the focus this week will be on crunch post-Brexit trade deal negotiations. The latest round of talks kick off today, after months of talks with no obvious progress but latest reports give a sense of change and optimism.    CMC Markets analyst David Madden said: “The latest discussions have been relatively positive according to David Frost, the UK’s chief negotiator. It is understood that Prime Minister Johnson wants to strike a deal, but not at any cost, so the discussions are likely to go down to the wire.”

Traders will also have an eye on a speech by ECB president Christine Lagarde this afternoon, as they weigh up the strength of support for struggling European economies.

In the US Stocks rose sharply on Monday as Wall Street built on strong gains from the previous session amid hope for a new deal on U.S. fiscal stimulus and several corporate deals being struck.  The Sentiment on Wall Street had been boosted  after House Speaker Nancy Pelosi said Sunday a last-minute coronavirus aid deal remains on the table as House Democrats try to forge ahead on a smaller aid package costing about $2.4 trillion.

Investors also cheered a slew of corporate deal-making activity. Devon Energy and WPX Energy announced they will move forward with a merger of equals, while Caesars Entertainment disclosed a cash offer to buy London-based William Hill.   And shares of major tech names rose broadly. Facebook and Amazon climbed 0.6% and 1.6%, respectively. Apple was up 1.5%. Alphabet advanced 1.3% and Microsoft traded higher by 0.6%.

12 years on from the financial crisis I find I’m strangely optimistic, despite the latest lockdown. the rising cases, unsure governments and limited agreement and leadership. I’m optimistic as I can see lessons have been learned as the market continues to correct itself.  Of course times are still difficult and markets volatile but the long term outlook is positive.

It is of course becoming increasingly clear that a vaccine is required before life returns closer to what it was but it will return, until then stay safe.