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The markets seem to believe the hype so I suppose that is the main thing. The entire problem, sorry, the majority of the problem, has been the lack of confidence in the interbank lending markets. There have been huge funds sitting on the sidelines, not willing to risk depositing with banks which might not be secure. The effective nationalisation of three of the major banks in the UK and the huge addition of liquidity elsewhere might get these funds moving again.

For all of the euphoria in the equity markets it is important to note that Libor rates are still considerably higher than base rates. This is even though we are anticipating rate cuts in the coming months. 3 month Sterling Libor is likely to be around 6.25% this morning and that is with base rates at 4.5%. This is lower than the end of last week but is still extraordinarily tight by historical standards. Unfortunately for those talking about the end of the current financial crisis this does not quite indicate such a rosy scenario. Outside of the major trading nations (who can afford, for the moment, to stand behind their financial institutions) the rest of the globe might well start to experience a sharp decrease in available liquidity.

Many corporates and wealthy individuals may well reallocate assets to the G8 nations.

The nature of this crisis might well be that as we attempt to extract ourselves from the mire all we succeed in doing is stepping on someone else and pushing them further down. In desperation they then grab hold of us and pull us back in.

The loan books of the big banks are truly massive and we have all grown fat on the back of easy credit. Much of this debt is built into the value of our property and I am very much worried that the well meaning attempts of the government to prop up the housing market by adding liquidity will backfire spectacularly. The idea that we are in a better position than others on the housing front “because we have excess demand” presupposes that there are jobs available that pay well enough to afford housing at the current levels. The falls in general values of around 12% from the highs can be seen as just ‘the froth’ being knocked off we have still to see real asset depreciation on a par with other asset classes. Equity markets dropping by almost 50% might well trigger a similar (not 50% but maybe 25 to 35%) long term depreciation in property values. If this happens then the injection of £50bn into the banks might not be enough especially if they are forced to start lending at 2007 levels once the Government assumes control.

Good Luck!

DB

For any users new to Clean Financial, please note that on Mondays we update a series of weekly articles including:

• Spread Trading - The Week Ahead
• Online Trading News - A Review of Last Week

We also have an update of this week’s Economic Indicators and Company Report releases and a quick review the weekend’s financial press, see ‘In the papers’.

Good Luck!

DB

Another new spread betting feature for you:

“The wild swings in markets over the past few weeks have not been conducive to sensible decision taking and the advise continues to be ‘sit on your hands and do nothing’. It is all very well for the Sage of Omaha to be entering the market but not many people can have his time horizon. Nearly all hedge funds get…” read full article >> Freaky Friday, Payroll and Lloyds HBOS.

Good Luck!

DB

Do not forget, each weekday we provide a Daily Trading Update each morning and around the close of the markets there is a Late Market Update.

Both come from leading spread betting companies and provide an insight into the current markets including commentary on support levels, resistance levels, big winners / losers and personal opinions on how the markets could play out.

Today’s Late Trading Update:

“Of course there still is only one game in town as far as financial markets are concerned and it is the progress, or lack of it, for the $700 billion bail out. The major stock indices have steadily given… ” read latest update >> The Late Trading Update.

Good Luck!

DB

The Spread Trading article has now been updated:

“Congress continues to wrangle over the Paulson plan but you have to believe that some form of accord will come out of Capitol Hill by the end of today. We can expect wildly gyrating markets over today’s session as rumour and counter rumour permeates through the closed doors where negotiations are taking place.

“Several Republican Senators (let alone the odd Democrat) are unhappy about being bounced into such a serious action with so little information. It is often the small print on which actions such as this flounder and the plan has hardly been thought of just yet let alone enshrined in law. It might be some while yet, even if there is broad agreement, before the first loan is acquired by the ‘Bad Bank’. To concentrate their minds the Fed wiped out the… ” read full article >> Spread Trading.

Good Luck!

DB