Shares To Suffer From Bond Market Blues
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If you have an investment portfolio which holds only big name UK stocks...
...and you've just come back from a seven-week holiday free from TV, newspapers and mobile phones...
...you could be forgiven for wondering what all the fuss has been about.
Particularly if you don't own any shares in banks or pub owners.
Because since reaching the dizzy heights of 6,717 on 13 July, the FTSE 100 share index is down...yes, all of 5%!
No big deal, and hardly justifying all the hysteria that continues to consume so many column inches.
Yet over in the debt markets it's all been very different.
Huge losses have been incurred. US mortgage lenders have gone bust. Hedge funds have been wiped out. And the ‘toxic waste' has spread well beyond the shores of the North American mainland. Emergency funding has had to be hastily arranged to re-finance banks as far away as Germany.
Estimates of repackaged American home loans bought by banks in the States, Europe and Asia range up to an unhealthy £250bn.
Bankers around the world have now got the jitters. They are trying to work out who is, and is not, safe to lend to, poring over their own balance sheets to guesstimate how many of the loans that they thought were OK...have gone bad.
And all the while the credit-rating agencies have been well ‘behind the curve', still assigning high credit ratings to what has proved to be very dodgy debt.
There have been dire warnings from bond watchers that up to 5,000 jobs could be axed in the City and Canary Wharf as a result of the turmoil. Some forecasters see as many as a third of investment bankers involved in the creation and selling of so-called ‘asset-backed securities' facing the axe.
You've probably worked out by now that the term ‘asset-backed security' has in many cases turned out to be a complete misnomer. The assets haven't proved to be worth anything like as much as, or indeed as secure as, the builders of these financial houses of cards liked to think they would be.
At the very least, the big bonanzas of yesteryear are firmly off the agenda.
Last week we heard that financial-sector bonuses added up to a staggering £14bn in the past twelve months. It could be some time before that sort of figure is seen again.
As I have mentioned before, if anything the rhetoric has been even more apocalyptic.
The chief executive of America's largest sub-prime mortgage lender has just predicted that the 'dislocation' in the US home-loan market could be the most severe since the 1930's Great Depression.
And today I read in the Financial Times that capital markets have suffered a 'heart attack' this summer and that the next four to six weeks will be crucial in seeing if the 'patient is going to die'.
Certainly the money-market temperature has been soaring. Yesterday the three-month sterling London interbank offered rate (LIBOR), at which banks lend money to each other, jumped to a near nine-year high at 6.8%, last seen during the crash of hedge fund Long Term Capital Management in 1998.
That is more than 1% above the Bank of England (BoE) base rate, compared with the usual difference of around 0.25%, and reflects the gut-churning queasiness that lenders are feeling about making new loans to other financial institutions. The credit crunch is already here and leading City bankers are pleading with the BoE to pump more cash into the system.
Even so it all sounds rather arcane. So what if a few bankers are having to justify their handsome pay packets?
Is this really going to hit London share prices?
Answer: yes it is. Not necessarily now, but more likely gradually, over time.
Because British companies will find it harder to borrow money at the rates they want. Private-equity managers will be unable to raise cash for 'leveraged' buyouts, i.e. taking over other businesses on borrowed money. So the takeover train that has driven up stock prices for so long will hit the buffers.
And the overall effect of the credit crunch will be to slow down economic growth, so that both company sales and profits will be hurt. The slashing of City bonuses means that less cash will be sloshing around.
But the stock market may well not suffer another period like the last seven weeks. This time it could be different.
I can see shares just drifting down as the bad news keeps on biting...
> Read more: More Bad Weather's On The Way... | Two Tier Britain.
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