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Shares, frozen money markets and bank bailouts

This note looks at the latest gyrations in financial markets. The key points are as follows:

• While shares collapsed last week this appeared to owe much to an investor panic regarding the freezing up of money and credit markets.

• Government moves to guarantee bank borrowing and inject capital into banks along with US moves to buy bad debt should help unfreeze money markets and hence enable shares to move higher in the short term.

• While the global economic slump will ensure the ride for share markets investors will remain rough, with shares having had huge falls from last year’s highs this should be largely discounted.

The Australian Government’s $10.4bn economic stimulus package is to be welcomed and along with falling interest rates and the fall in the $A should help buffer the Australian economy against the global economic
slump. Nevertheless, Australian economic growth is still likely to slow sharply over the year ahead and its about 50/50 as to whether Australia will have a recession or not.

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