The credit crunch and stock market uncertainty continue to be at the fore of financial news.

The bail out of US mortgage lenders Freddie Mac and Fannie Mae by the US Treasury Department this week was welcome news. The US Government will now guarantee the USD5.3 trillion worth of their mortgages eliminating a ripple effect on other markets should a collapse have occurred. The rescue demonstrates the US Government’s commitment to providing support for the US economy which in turn will benefit the global economy.

US stock markets are braced for further declines after Lehman Brothers’ third quarter figures undermined confidence in the financial sector. The knock on effect has been felt in European and Asian markets.

The EU has updated its economic forecasts and adjusted its prediction for GDP growth to 1.3% from the 1.7% it predicted in April. It cited the reasons as growth slowdown and higher inflation because of the financial situation in the financial markets, higher commodity prices and the troubled housing market.

Last week the Bank of England kept the UK base rate at 5% for the fifth successive month as it attempts the difficult task of maintaining control over inflation while being aware of concerns of a recession in the UK. However, it is reported that many economists are expecting some sort of cut by late 2008 or early 2009.

Looking at currencies the dollar is reasserting itself as one of the world’s strongest currencies, a dramatic reversal over recent months. It looks like the three year major bull trend for the euro-dollar is finished. The dollar now stands at USD1.410 per euro.

Record oil prices reached in July have plummeted as commodity index investors, blamed by many for the crude oil bubble, sold USD39 billion worth of oil futures between the July record of USD147.27 and 2 September, causing the crude price to plunge. Saudi Arabia, the world’s largest oil producer, recently increased production and this assisted in the reduction in the price of oil. OPEC, however, has decided this week to cut production in an attempt to stop any further falls in price. Experts reportedly expect the price to stabilise at around USD100 a barrel.

Many analysts still believe in the long term success of commodities in general, despite the short term effects of the credit crunch and recession. Power drivers sit in the background: population growth, infrastructure demands and compelling valuations. A huge drift towards cities has accelerated growth in urban populations in developing countries with India and China currently standing at 29% and 40% respectively.

Short term variations in the stock markets in response to the latest data releases may provide investors, who wish to make regular contributions, the opportunity of dollar cost averaging.

Whichever way the financial markets respond to the effects of the credit crunch or to find out more about dollar cost averaging, make sure you speak to your Account Executive to find out how you can access Hansard’s extensive range of fund links when creating and reviewing client portfolios.

David Findlay

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