Credit fears return to spook markets

Western stock markets finished the week as they started, with concerns about the impact of the credit crunch returning with a vengeance on Friday.

But, in a dislocation from Wall Street, shares in some emerging markets and Asian bourses flirted with record highs as traders chose to remain optimistic about the prospects for continued economic growth in developing economies.

After a sell-off on Monday, a few days of relative calm and steady gains for equities saw investors hoping they had witnessed the beginning of the end of credit woes.

The three-month sterling London interbank offered rate – the rate at which commercial banks lend to each other – fell back from its 8½-year high of 6.9038 per cent touched on Tuesday to finish at 6.8238 per cent on Friday.

News that Countrywide, the biggest mortgage lender in the US, had secured more funding added to the perception that money markets were slowly starting to operate more freely.

However, the Bank of England’s bail-out of Northern Rock, the UK bank, saw even this cautious optimism quickly evaporate.

In equity markets, the FTSE 100 relinquished a large chunk of the hard-earned gains on Friday but still gained 1.6 per cent over the week.

The mood was not helped by weak retail sales data from the US, though by lunchtime in New York the S&P 500 was down just 0.2 per cent for a gain of 1.8 per cent on the week.

Alan Ruskin at RBS Greenwich Capital said the retail sales data would add some fuel to the fears that the American consumer was showing the first signs of buckling.

“Allowing for the upward revisions to the July data as a small offset, the August data was softer than expected, any which way one slices it,” he said.

Asian equities will have to wait until next week to react to the US retail report, but many exchanges will be making their moves from record, or near record, levels.

India’s BSE Sensex was hovering close to its peak and the Shanghai Composite gained 0.7 per cent on the week.

The resignation of Japanese prime minister Shinzo Abe was a drag on the Nikkei 225, which rose just 0.03 per cent over the week.

But the star performer was Hong Kong. The Hang Seng index rose 3.8 per cent to a new record and is more than 33 per cent above its March low.

The territory’s proximity to China’s remarkable expansion continued to attract funds, while talk that restrictions on mainland investors buying Hong Kong equities would soon be lifted provided further impetus.

The record close came before Friday’s announcement by the People’s Bank of China that it had raised interest rates, as it attempts to damp inflation, which this week touched a near 11-year high.

Jing Ulrich, at JPMorgan, said: “We expect at least one more rate increase in the next six months.

“Inflation risks are on the rise in China, sparked by structural changes in the demand-supply situation for foodstuffs, as well as excess liquidity on the back of the widening trade surplus.”

China’s monetary tightening stands in contrast to expectations for a rate cut from the Federal Reserve next Tuesday.

The dollar weakened as many currency market participants bet that the Fed could trim the cost of borrowing by 50 basis points.

The dollar fell to a new low of $1.39 against the euro and hit a 30-year trough against the Canadian dollar.

The latter, which is seen as a commodity currency, was boosted by renewed strength in oil prices.

In commodities, oil set records for three successive sessions, breaching $80 a barrel for the first time.

The milestone was hit in spite of a decision by the Organisation of the Petroleum Exporting Countries to increase production by 500,000 barrels a day.

Gold held its position above $700 an ounce, in response to the weak dollar.

Wheat hit a record high of $9.11¼ per bushel on fears of a global shortage, but trimmed some of its gains on profit taking.

Government bonds lost some ground but yields remained close to recent lows in anticipation of the Fed easing interest rates on Tuesday. The yield on the 10 year Treasury ended the week 11 basis points higher at 4.49 per cent.(Financial Times )