Weekly Markets Review

Index Movements

General Summary

It was an historic week on Wall Street thanks to some historic dealings on Capitol Hill. Not all of those dealings, though, were good for the global equity markets. The most damaging was the decision Monday by the House of Representatives to vote against the Emergency Economic Stabilization Act of 2008. That vote was stunning for the simple reason that it appeared to all outside parties that Congressional leaders reached an agreement on the relief plan over the weekend. That "no" vote shook the market's confidence to the core given that every key leader in Washington had warned of the grave consequences for the economy if a relief plan was not passed. Substantial losses were further compounded by reports of government-led bailouts of financial institutions in Europe and an FDIC-brokered sale of Wachovia's banking operations to Citigroup for just $2.2bn.

The market staged a sizable rally on Tuesday, recouping a little over half the losses it suffered on Monday. That move was forged on the belief that the severity of Monday's losses would prompt the House to reconsider its position and ultimately pass the relief plan. The market suffered another sharp sell-off Thursday as the economic concerns took precedence over news the Senate passed the relief plan by an overwhelming majority, as expected. It also rattled the market that General Electric completed a multi-billion dollar stock offering at a price of $22.25 per share that was nearly 10% below its closing price Wednesday. GE attracted added attention Wednesday after Berkshire Hathaway, run by famed value investor Warren Buffet, announced it was going to make a $3bn investment in perpetual preferred stock from the company that paid a 10% dividend. Berkshire also received warrants to purchase $3bn of common stock. Buffet's involvement was viewed favourably at first, yet the hefty dividend this triple-A rated company agreed to pay spoke volumes about the frenetic state of the market.

In a reversal many thought likely, the House approved the revised relief plan by a 263 to 171 margin. Leading up to the vote, the S&P 500 index was up as much as 3.5% in Friday's trade. Strikingly, it began to sell off almost instantly on the news that the House voted in favour of the relief plan. The reversal of fortune was attributed to a sell-the-news response, though we suspect it was rooted in the understanding that the plans for the credit market and the economy won't occur instantly, or smoothly, in the wake of the plan's implementation. A 10% drop in the CRB Index, which includes 19 commodity futures like oil and copper, reflected global slowdown concerns.

Economic News

The latest US ISM manufacturing survey fell to its lowest level since October 2001, US factory orders fell 4% in August, the US economy lost 159k Nonfarm jobs which was the largest since March 2003, but the unemployment rate remained unchanged at 6.1%. Despite the financial turmoil the ECB left its benchmark interest rate unchanged at 4.25%, but signalled it may be forced to rethink its strategy by the next meeting.

Events To Look Out For This Week

The Bank of England's MPC meets this week to decide on UK interest rates and due to the economic uncertainty the market now suggests a 25 basis point cut with some commentators calling for a 50 basis point cut. It may be they choose to leave rates unchanged wanting to see if inflation has been quelled before committing to a cut despite the more than apparent collapse of confidence on the high street in particular.