As weeks in the markets go it was probably the most eventful for years. It started with equities plummeting around the world and ended with a rally after concerted action on several fronts by the American authorities. For good measure it also included the biggest investment banking fraud in history with a €4.9 billion (£3.6 billion) loss at France’s Société Générale.
The highlight of the week was probably the surprise three-quarter point cut in rates by America’s Federal Reserve. In its official statement the Fed said it: “took this action in view of a weakening of the economic outlook and increasing downside risks to growth”.
But it was not only fears of an American recession that spooked the markets. The downgrading by Fitch, a credit rating agency, of Ambac Financial, a bond insurer, also seemed to indicate that the problems in the credit markets were far from over.
The downgrading affected not only Ambac but also the bonds that it insured. It turned out that many of the assets in its portfolio were backed by subprime mortgages.
Ambac’s problems prompted the authorities to announce a rescue package for bond insurers. The main American banks agreed to inject billions of dollars of capital into the sector.
The final key element of the American response was a fiscal stimulus package. Its central element was the announcement of $100 billion (£51 billion) of tax credits for about 117m American families this spring.
Many in the investment industry took a relatively upbeat view of the week. Mike Lenhoff, the chief strategist at Brewin Dolphin, says the Fed action was a catalyst to return equities to reasonable valuations. Before its move “the markets were sold down to valuations that looked very inexpensive”.
James Carrick, an investment strategist at Legal & General Investment Management, takes a similar view. “Markets look a bit oversold if you look at the macro data”, he says. “A lot of bad news is already anticipated [in equity prices]”. However, he also warns of inflation risks that are being downplayed.