Turmoil continues

28 February 2008

Despite a growing list of casualties in the global banking sector, including Countrywide in the US, Northern Rock in the UK and both SachsenLB and IKB in Germany, the wider stock markets seem to be weathering the storm fairly well now. Share prices jumped back up in mid-September following the US Federal Reserve's decision to cut 0.5% off its headline interest rate.

This move was well received by the markets, particularly in the US, and it helped push the Dow up 4.31% between weeks 34 and 38. Other major indicators also responded well, with the FTSE 100 rising 3.3% and even the beleaguered Nikkei 225 managing a 1.01% improvement.

With the Dow back in 13800 territory it is not far off the record highs it achieved in July just prior to the crunch, when it topped-out at 14121 points. As of late September it was only about 2% below this high water mark.

Crane shares followed the markets back up over the four-month period, with the IC Share Index posting a 4.03% gain. But although it tracked the Dow's gains, the sector is not really in sight of the pre-crash highs it achieved. Its high point also came in July at 719.75 points, so it is still a good 10% below this at its level of 648.16 points in late September.

As one would expect, it was the US manufacturers that contributed most to the lifting sector's recovery. Manitowoc stood out with a 17.41% gain, and its two-for-one stock split in week 37 underlines the buoyancy of its shares. Indeed, the company's previous stock split, again a doubling of the number of shares in circulation, was as recent as April 2006. It is not just Manitowoc that has taken such moves to increase the availability of its shares. KCI Konecranes, Palfinger and Terex have all carried out stock splits in the last 18 months.

This underlines the fact that, notwithstanding the current seizures in the machinery of global banking, the world economy remains strong, and demand for cranes continues to grow. However, the key question of the current crisis is how much will the difficulties in the banking sector impact on the real economy, and how well will central banks like the Fed manage the current problems and uncertainties?

Currencies

Although it was widely expected, the Fed's September interest rate cut had an impact on the value of the US Dollar. Although it held its own against the Pound and Yen, it dropped to a record low against the Euro, surpassing the US$ 1 = € 1.40 mark for the first time.

It remains to be seen whether other central banks like the Bank of England and European Central Bank follow suit, which would help the Dollar regain some of its value. However, it seems unlikely that the Bank of Japan and, anyway, with the headline cost of borrowing at just 0.5%, there is not a great deal of room for a cut.

Outlook

These are certainly extraordinary times for the banking sector, and the markets as a whole. Events like the run on Northern Rock - the first run on a UK bank for well over a century - underline how volatile the sector is.

Obviously events like interest rate cuts will improve the problem by improving liquidity and generally boosting business. However, there is also a school of thought that the current crisis is itself a product of the period of low interest rates that started in 2001 following the 9/11 terrorist attacks in the US.

Some commentators would argue that credit became too widely available in that period, and that lowering interest rates now will not fix this fundamental problem.

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