Overview: Bernanke comments fail to dispel nervousness

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The mood in financial markets remained extremely nervous on Tuesday as investors absorbed bleak economic data from China and the UK and continued to fret about the outlook for corporate earnings.

Ben Bernanke, the chairman of the Federal Reserve, offered some support as he said that fiscal stimuli alone would not be enough to drive an economic recovery and that more should be done to relieve banks of loss-making mortgage assets.

Lena Komileva, head of G7 market economics at Tullett Prebon, said the remarks signalled a “significant turning point” in the US policy response to this crisis.

“The Fed chairman’s comments have turned attention from the effects of the crisis, in the form of bank illiquidity and eroded capital ratios, back to the source of the problem – ‘excess’ borrower risk trapped onto lenders’ balance sheets since the demise of securitisation markets in the summer of 2007,” she said.

However, European equity markets ended lower in spite of the Fed chief’s remarks. The FTSE Eurofirst 300 index ended 1.5 per cent lower, but managed to hold above the level at which it started the year.

By the close in New York, the S&P 500 index was up 0.2 per cent.

In Asia, Tokyo dived 4.8 per cent as investors played catch-up following Monday’s public holiday in Japan. The rest of the region put in mixed performances.

Andrew Milligan, head of global strategy at Standard Life, said: “Financial markets are likely to remain volatile while investors monitor a series of policy measures needed to offset a deep recession.”

But Steve Barrow, strategist at Standard Bank, warned that policymakers would not be able to “bounce” their economies out of recession with swift and aggressive policy easing.

“This is not a normal recession,” he said. “It is a recession that follows the biggest liquidity boom the global economy has ever witnessed, between 2002 and 2008. The world partied hard on all this liquidity but, after the biggest party, we can only expect the biggest hangover.”

Concerns about Chinese growth were rekindled by data showing that the country’s exports had declined by 2.8 per cent in December.

Trade data for November showed that Britain’s exports also collapsed at the end of the year.

“With demand on the continent and elsewhere so weak, in the near-term at least, the lower pound is unlikely to make much difference,” commented Paul Dales at Capital Economics.

A flurry of gloomy surveys from the British Chamber of Commerce, British Retail Consortium and Royal Institute of Chartered Surveyors also pointed to a sharp contraction in the UK economy in the fourth quarter.

“The reports raise question marks about whether the [Bank of England’s] monetary policy committee was right to slow the pace of policy easing last week,” said Nick Kounis, chief European economist at Fortis Bank.

“We think that the Bank Rate will still end up not far from zero by the end of this quarter.”

The focus in government bonds was on Europe as the spread of most eurozone yields over German Bunds widened to their highest levels since the introduction of the euro in 1999 after Standard & Poor’s said it may cut Portugal’s sovereign credit rating, after similar warnings to Spain, Greece and Ireland.

Portugal’s yield spread over Germany jumped to more than a full percentage point, as the yield on the 10-year Bund fell 1bp to 2.98 per cent. The 10-year US Treasury yield edged down 1bp to 2.291 per cent.

In currency markets, the euro fell to one-month lows against the dollar and the yen, while the New Zealand dollar sank against its US counterpart after New Zealand was also threatened by S&P with a ratings downgrade. The dollar found support from news of a steep contraction in the US trade deficit in November.

“Weakness in overseas demand and the US currency’s prior surge are being more than offset for now by the past collapse in oil prices,” said John Higgins at Capital Economics.

In commodities, oil prices rebounded after Mr Bernanke’s comments fired hopes of fresh action to address the credit crisis and as cold weather conditions were forecast. Nymex West Texas Intermediate rose 19 cents to $37.78 a barrel.

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