The Week Just Gone

Another week and another plunge for equities, more fears about the intensity of the global recession and renewed scepticism over the troubled financial sector. Yet again, flight-to-safety trades such as the US dollar and government bonds took centre stage.

The FTSE 100 fell below 3500 on Friday, to the lowest level since March 2003 as investor pessimism intensified. The index has lost more than 20% since January. It closed the week at 3530.73, ended Friday’s session virtually unchanged and bringing the week’s overall decline to almost 8%.

Major US indices suffered another miserable week, recording eight losing weeks out of nine in 2009 and falling to 12 year lows. The Dow is currently down by 53.2% since its peak of October 2007.

The S&P and Dow saw weekly declines of 7.1% and 6.2%, respectively. The NASDAQ is at lows not seen since 2002, having lost 6.1% over five days.

In an attempt to restore flagging confidence, the Bank of England cut its target interest rates by 50 basis points to 0.5% and announced plans to start quantitative easing by “printing money” to purchase government bonds and other securities with an initial amount of £75 billion.

The ECB cut its benchmark interest rate to 1.5%, as expected. It also sharply cut its 2009 forecasts for GDP growth and inflation, slashed growth forecasts to -2.6% from its previous forecast of -0.5%. Interest rates could be cut to 1% in April.

UK gilt yields plunged in response to the BoE’s latest attempted liquidity injection, while a surge in US unemployment also weighed on bond yields. Yields of 10-year T-bond, Bunds and Gilts were down by 15, 58 and 20 basis points respectively.

A soft jobs report from the Labour Department showed that U.S. employers axed 651,000 jobs in February and unemployment climbed to 8.1%. While the figure was near economists’ expectations for a 648,000 drop in non-farm payrolls, January and December job losses were revised sharply higher, indicating the labour market was weaker than previously thought.

Sterling was one of the main fallers in currency markets this week, it fell against all G10 currencies except the Swedish krona. The euro resisted selling pressure despite the reduction in ECB interest rates. Sharp, concerted falls in global equities, (with the exception of China) spurred demand for safe haven currencies like the Swiss franc.

The Week Ahead:

The week ahead will bring data on wholesale inventories, import and export prices, and the University of Michigan’s preliminary March reading on consumer sentiment. The future of General Motors will remain a hot topic, after a regulatory filing on Thursday revealed the company’s auditors have doubts about its ability to stay out of bankruptcy.

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