CLSA’s Christopher Wood is less than impressed by the Fed’s move to orchestrate co-ordinated central bank action. First, he says, Ben Bernanke acted in “predictable fashion” by cutting the Fed funds rate 25bp to 4.25%, after showing “insufficient concern” about the potential for economic weakness.

The result – last week’s “panicky” co-ordinated $40bn “term auction facility” from five central banks including the Fed, left the 3-month Treasury bill yield still 139bp below the federal funds rate as of last Friday. But more rate cuts are coming, he predicts.

Meanwhile, Wood sees growing hope among investors that the recent investments made by sovereign wealth funds mark the bottom for western financial stocks. But, he warns, while more such investments are coming, those western financials have by no means reached the bottom.

The long-term challenges presented by the unwinding of the securitisation and structured finance model remain formidable, says Wood.

The potential contraction of this “credit edifice” represents a highly deflationary risk for the global economy and one that is likely to lead to massive government intervention before the cycle is fully played out, with most of that intervention centred on the western world.

Financial accidents or financial crises can have serious short-term implications for stock markets. Future financial accidents or crises will accelerate Fed easing to the ultimate benefit of the next “bubble candidate” – which, in Wood’s view, remains Asia and emerging market assets, “a category which including equities and property”.

Speaking of Asia, Wood sees some evidence in Japan of greater local institutional buying of Japanese equities. But there is not yet overwhelming hard evidence of Japanese retail investors returning to their own stock market, which is what is really needed to breathe life into the market.

The Bank of Japan governor Fukui continues to back off his previously laudable goal of normalising rates, notes Wood (understandably so, we might add, given last week’s gloomy tankan report that showed business confidence at a two year low), reiterating his belief that the BoJ should raise the overnight call rate to 1.5 per cent “immediately”. But there is no evidence at present that this is going to happen. But typically finding a silver lining to ever black cloud, Wood says domestic Japanese stocks are “only likely to outperform right now if global stock markets are declining”.

And despite Monday’s Japanese share market performance – with the Nikkei declining 1.7 per cent and Topix down nearly 2 per cent – that may eventually be the case.

This entry was posted by Gwen Robinson on Monday, December 17th, 2007 at 10:11 and is filed under Capital markets. Edit this entry.