Pop! Footsie leaderboard at 8.30 BST:
Barclays +14.5 per cent
HBOS +14.4 per cent
RBS + 14 per cent
Wolseley +12.5 per cent
LSE +11 per cent
Lloyds TSB +10.5 per cent
StanChart +9.5 per cent
Kingfisher +8.6 per cent
Schroders +7.3 per cent
Fags +6.8 per cent
With the FTSE 100 up 3.7 per cent – or 200 points – this appears to be what one market watcher described as a “whiplash of hope.”
Equity investors at least are treating the governmental backstopping of Fannie Mae and Freddie Mac as the cathartic event that marks the end of this prolonged crisis. Just as they did back in March, when Bear Stearns imploded.
For what it’s worth, the snap views of market strategists were decidedly mixed on Monday.
Bernstein at Merrill Lynch:
First and foremost, we continue to believe that it is too early for investors to overweight financial stocks despite these actions. Traders might want to look for shorter-term “knee jerk” reactions to this weekend’s announcement, but for the reasons cited below, we remain cautious on the overall sector. We still believe that rallies in Financials should be used as opportunities to sell into strength. Brian Belski, our US sector strategist, has suggested that investors interested in Financials look primarily to high quality Insurance companies and Asset Managers.
We reiterate that the catalyst for the sustained outperformance of Financials is likely to be when the government forms an entity specifically designed to facilitate the consolidation of the financial sector (i.e., like the Resolution Trust Corporation during the 1989/91 period). As we have pointed out, government actions continue to attempt to maintain the status quo among financial institutions. There has yet to be a remedy that approaches the credit crisis as a systemic problem. As with the Bear Stearns situation, the GSEs are being treated as a one-off problem.
Bruce Packard at Pali International:
The key message is: banks do not trade at substantial discounts to book for long, either they recover or they get nationalised. We estimate tangible book end 2008F for BARC 306p (Neutral), RBS 213p (Neutral) and HBOS 395p (BUY). We rate BB/ SELL zero pence target price.
For the UK banks, much depends on whether CDS spreads begin to fall back down now, as they had blown out again over the last month, perhaps because of debt market concerns about what was going on in the US. For instance HBOS 5 year senior CDS were above 200bp last week, compared to a March peak of c. 250bp
Marco Annunziata at UniCredit:
We see this move as unambiguously positive: the plan should help restore recently flagging confidence in the US growth outlook, and it should inject a measure of confidence in the outlook for the financial system at another crucial juncture, ahead of feared quarterly results by major banks. Some risk appetite should be restored, and the plan should also help shore up sentiment on emerging markets, which has been badly hit in recent days. Market sentiment swings easily and violently in the current climate of uncertainty, and after the gloomy mood of last week we might now get a whiplash of hope. Then the roller-coaster is likely to continue, as uncertainty on the macroeconomic and financial outlook persists and government intervention keeps pace in a piecemeal and targeted way. It is a constant game of brinkmanship, with government intervention triggered only where and when it has finally become essential. Nerve-wrecking, but so far effective.
Richard Ramsden at Goldman Sachs
The bail-out of the GSEs removes the uncertainty surrounding the valuation of bank owned GSE securities and eliminates the tail risk in the mortgage market, in our view. That said, it does not radically alter fundamentals for many banks:
1) Liquidity maintained: The actions help reduce mortgage rates and improve liquidity, which reduces the tail risk of a crunch in mortgages. We see this as supporting the status quo (pre summer), but not dramatically altering the supply of credit outside of conforming mortgages.
2) Write-downs to come: US banks hold GSE preferred stock, which looks set to lose most of its value. However, banks are also major holders of agency debt and MBS, where values should improve, reducing unrealized securities losses.
3) Credit deterioration does not stop: GSE actions are helpful for housing, but unemployment data is materially worse than expected. Californian unemployment now stands at 7.6%, while 12 states saw unemployment increase by over 150 bps year on year.