While a week may be a long time in politics, we have seen that it is certainly true in financial markets at the moment.

The US Government first intervened to save AIG following its near collapse. Meanwhile in the UK, following a steep decline in its share price, HBOS was forced to accept a takeover by Lloyds TSB, a move that will see the formation of the UK’s largest banking group with roughly a one third share of the UK retail banking market.

Stock markets continued to tumble until the US Government made a second intervention and announced a USD700 billion plan to set up a fund to buy back much of the bad debt held by banks. The new fund will aim to sell off these “toxic” assets in the future, perhaps at a profit. This led to stock markets registering their largest daily gains since the 1930s.

Markets were also helped by US and UK regulators temporarily banning the short-selling of financial stocks. The US and UK Governments are also taking the initiative on greater international regulation and are proposing a framework for stricter governance of the global financial system.

The scale of US Government intervention could put the dollar under pressure. While the move will restore confidence in the stock markets, analysts see traders continuing to focus on the budget, the current-account deficit and negative real US interest rates.

The dollar stands at USD1.4568 per euro and 106.46 yen to the dollar. Two currencies, which have been the biggest losers against the dollar in recent months, have been Brazil’s real and Australia’s dollar. However, analysts forecast both to rebound if demand for higher-yielding assets reappears.

UK retail sales unexpectedly jumped in August by 1.2%, against a market concensus expectation of a 0.5% drop, and were 3.3% higher year on year. However, sales for the three months to August fell 0.8% compared to the previous three months, the largest drop since 1990.

The price of crude oil has risen sharply in the last week due to speculation that the stabilisation of financial markets following the US Government’s rescue plan will invigorate demand. Crude oil for October delivery rose to USD105.77 a barrel on the New York Exchange.

A new gas and oil field on India’s east coast has started production. India is Asia’s third-biggest economy and imports 70% of its energy needs and doesn’t produce enough natural gas to meet demand for power and fertiliser producers. The new field raises the possibility of further oil discoveries that could reduce India’s massive deficit on the supply side.

Making investment choices in the current turbulent markets is more complex than ever when it is difficult to tell short-term reactions from long-term trends. Your Hansard Account Executive will be able to assist you on accessing Hansard’s extensive range of fund links when creating and reviewing client portfolios.

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