City given boost from mortgage bailout
The US government’s bailout of two mortgage lenders has prompted a global market rally that could signal a turning point to the current turmoil.
On Sunday, US Treasury Secretary Henry Paulson confirmed a $200 billion investment in mortgage giants, Freddie Mac and Fannie Mae, which together finance nearly 50% of all mortgages in the US. The deal will see the capital used to help keep the two firms solvent.
President George Bush has admitted that, without government intervention, the two lenders posed an unacceptable risk to the American economy. This is the third time the government has pumped money into the struggling US economy this year. In March it acted following the collapse of Bear Sterns and in July made initial efforts to help Freddie Mac and Fannie Mae.
The investment, which is over 25 times the size of the Northern Rock rescue package, means the US government now effectively owns around half of US mortgage debt.
The rescue package has prompted a rally on the European and Asian stockmarkets, with banking stocks feeling the benefit.
In the UK, the FTSE 100 jumped nearly 4%, with shares in Royal Bank of Scotland and HBOS up 13%.
Jeremy Tigue, head of global equities at F&C Investments, says the US government’s actions are extremely significant and could “signal a real turning point”.
“The scale of the rescue means it removes a huge amount of systemic risk from the global financial system,” he explains. “It also provides support to the ailing US housing market by ensuring mortgages will still be available, albeit at more expensive levels than in the past.”
However, Tigue adds that the US economy looks set to remain fragile for the foreseeable future
In another piece of good news, official UK data revealed that the cost of products leaving factories fell in August – suggesting that inflation at factory-level could have peaked. The fall is the result of cheaper crude oil.
Nur Ata, an economist at the Centre for Economic Business Research, says if inflationary pressures at the factory gate have reached their peak, then this should start to feed through to retail prices in the coming months.
“We expect that the slowing global and UK economy will alleviate the inflationary pressures in the medium term,” Ata adds. “This will allow the Bank of England to make rate cuts possibly before the end of the year to support the slowing UK economy."
Gordon Brown also indicated his optimism in the forward to the 2008 Labour Party conference.
He writes: “I am confident that we can come through this difficult economic time and meet these challenges a stronger, more secure, and fairer country than ever before.”
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).