Economic news digest

The ratings agencies have been busy: we are awash with downgrades and warnings. First up, S&P. They have ranked banks’ health using a new methodology, and it makes for grim reading. Just nine of 45 banks exceeded the minimum “risk-adjusted capital” ratio (for example, HSBC did well; UBS and Citigroup less so). The results are important because the new methodology foreshadows the new capital regime ratio likely to be adopted by Basel next year. S&P conclusion: “Capital for the majority of banks remains a relative weakness.”

Next, Fitch has downgraded Mexico to BBB, just two notches above junk status. The decision was based on growing concern for the country’s medium-term fiscal outlook and growth potential. And not to be outdone, Moody’s has three warnings out: (1) a downgrade warning for bonds secured against CRE; (2) a caution for India on problem loans; (3) and data on rising credit card delinquencies.

There is some good news, though. The Bank of Israel has unexpectedly raised rates by 25bps to one per cent. The move is to combat anticipated inflation rises, although the Bank warned that the economic recovery was still uncertain, and said the current rate was still “accommodative”. Meanwhile, China’s five largest banks have submitted capital-raising plans after massive amounts of lending. Indeed, Chinese regulators are urging banks to slow lending as well as to raise capital. And can Africa benefit from the self-seeking efforts of investors? The promise of high returns is tempting investors back to the continent.

Also good news – or at least, not bad news – is home resales in the US, up 10.1% in October (after a rise of 8.8% in September). Many explain the rise by the imminent end of the homebuyer tax credit. Calculated Risk dismisses the news as “largely irrelevant” and cautions us not to “mistake activity for achievement”. The key, they say, is to reduce the inventory of houses, which in turn requires household formation, and thus jobs. Their theory is supported by research showing adult children living with their parents and delaying marriage and children.

And investors see the end of the efficient market hypothesis: two-thirds of CFA members no longer believe that market prices reflect all available information. The Telegraph wonders why it has taken so long:

“The best response I’ve heard to the efficient markets theory that has dominated thinking about investment for 30 years or more is a joke. Two men walking down a street spot a £20 note on the pavement. One, an economics professor, says to the other: “don’t bother to pick it up – if it were really a £20 note it wouldn’t be there”

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