Takeover adds to issues facing investors
Investors are likely to be wrestling this week with fallout from the U.S. government takeover of Fannie Mae and Freddie Mac plus a sharp about-face in currency trading and signs of trouble in emerging markets.
The takeover of Fannie and Freddie may buoy investors, who have been wondering whether the government would step in to ensure the mortgage giants wouldn’t fail. But investors will also be bracing themselves for the next wave of U.S. bank earnings reports, which begin in earnest next week, hoping that huge losses from the credit crisis are a thing of the past.
A major financial story of the last few weeks has been the strengthening of the dollar against major currencies. The so-called dollar index, a measure of the greenback against six other currencies, has risen in seven of the last eight weeks and is on track for its largest quarterly percentage gain since the fourth quarter of 1992.
Britain’s pound has been particularly hurt by the shift, falling rapidly to levels against the dollar last seen 2 1/2 years ago, around $1.76. But the euro too has fallen and now trades around $1.42 compared with $1.60 in mid-July.
For equity investors, these kind of moves can have a significant effect on returns, especially in a climate of falling or weak stock markets.
“Equity investors typically don’t hedge the currency risk,” said Michael Metcalfe, head of global macro strategy at State Street Global Markets. He noted that at the end of 2007, U.S. investors held as much as $5.3 trillion of foreign equities.
A strong dollar would mean the conversion back from currencies including euros and pounds could be costly, prompting investors to try to repatriate profits in case the trend continues.
Metcalfe also notes that a stronger dollar may put off overseas investors, including huge central banks, from buying U.S. assets. He noted that custody holdings of U.S. Treasuries had begun to fall in the last month.
“That might be the first warning sign that dollar strength will lead to slow accumulation of dollar assets by central banks,” he said.
A somewhat related shift is also taking place on emerging markets, the once-booming asset class that is now under threat from slowing developed economies.
Friday’s poor U.S. jobs data showed the U.S. economy still suffering despite some recent upbeat data.
Emerging-market equities have been underperforming their developed-country counterparts for most of the year and are coming under more intense scrutiny as the global slowdown spreads.
U.S. financial markets have lurched back to near their July lows with the employment picture deteriorating and uncertainty running high over the health of some key financial players. The market remains on shaky ground -- as evidenced by the Dow Jones industrial average’s 344-point drop Thursday.
With data on retail sales, pending home sales, the trade deficit and wholesale inflation on tap this week, investors appear to be hoping for the best but bracing for the worst.
“Right now, the momentum seems to be more negative than positive,” said Michael Materasso, senior vice president and co-chairman of Franklin Templeton’s fixed-income policy committee.
The Dow finished last week 2.8% lower, even after rising modestly Friday despite a big jump in the unemployment rate. The Standard & Poor’s 500 index ended the week down 3.2%, while the Nasdaq composite index dropped 4.7%.
Wall Street has been hesitant to make any long-term bets on stocks not only because of the weak U.S. economy, but also because of the teetering global economy. On the surface, it’s a positive that oil has fallen and that the dollar has rebounded. But investors know the reason for the shift is that other countries are following the United States into an economic slowdown.
“You’re seeing a big shift in forecasts for global economic growth, and that’s definitely having its impact on the markets,” Materasso said.
If the United States beats other developing nations in rebounding from what many economists are calling a consumer recession, the U.S. stock market should benefit.
“The U.S. is first in; it’s probably first out. That’s what the dollar is reflecting,” said Richard E. Cripps, chief market strategist for Stifel Nicolaus. “But the light at the end of that tunnel isn’t here yet.”
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(BEGIN TEXT OF INFOBOX)
At a glance
Today
Federal Reserve releases consumer credit figures for July.
Results of weekly Treasury auction.
Sentencing hearing for
Broadcom co-founder Henry Samueli in U.S. District Court in Santa Ana.
Tuesday
House Judiciary Committee hearing on competition in the package delivery industry.
House Budget Committee hearing on responding to a weakened economy.
Wednesday
Senate Commerce, Science and Transportation
Committee hearing on prepaid calling cards.
Federal court hearing on legality of anti-abortion group’s effort to create website and air radio ads against Sen. Barack Obama’s views on abortion.
Thursday
Commerce Department
releases international trade results for July.
Labor Department reports on weekly jobless claims.
Treasury releases federal budget for August.
Freddie Mac releases weekly mortgage rates.
House Transportation and Infrastructure subcommittee hearing on the Federal Emergency Management Agency’s strategy for housing people after a natural disaster.
Quarterly earnings results expected from Campbell
Soup Co.
Friday
Commerce Department
releases the retail sales report for August.
Labor Department releases the producer price index for August.
Sentencing scheduled in Los Angeles for Daniel Heath, convicted of bilking millions of dollars from elderly investors.
Saturday
U.S. Department of Housing and Urban Development, National Community Reinvestment Coalition and HUD-approved housing counseling agencies discuss fair-lending requirements, how to avoid predatory lending and foreclosure alternatives.
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Source: The Associated Press
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Los Angeles Times
