The House of Representatives is the lower house of the US Congress and is designed to be a more populist house than the Senate, with every representative up for re-election every two years; as the Emergency Economic Stabilization Act of 2008 is so unpopular with the American electorate, who don't want to bail out US banks nevermind subsidiaries of foreign owned banks, it is no surprise that the house voted to reject the bill. As the Bush administration have been running around predicting dire consequences for the wider economy if the bill wasn't passed, it is also little surprise that the markets have dived, with the Dow Jones and S&P500 posting their largest ever one day fall.
There was optimism before the vote in the house and this helped the Dollar push Sterling lower, to an almost record one day fall, and even when the bill failed in the House, the Dollar has managed to keep most of it's gains, holding to around 1.81 this morning. The resilience of the Dollar is likely due to the clear signs of the banking woes spreading beyond the US, and into Europe. The UK has already suffered with a number of banks falling by the wayside and needing to be bought or bailed out, but with Fortis bank being de facto nationalised, and a German finance company seeking a €35bn credit guarantee, the problems have now spread to the European mainland. Europe has also suffered with business confidence at a 5 year low, but mortgage lending in the UK has ground almost to a stop, with just £143m in August, down from £2.9bn in July. The Euro fell against the Dollar, down below 1.44, but actually rose against the Pound pushing the GBPEUR rate down below 1.2550.
With the stock markets collapsing, what remained of the market's risk appetite has also dwindled, and the clear barometer of that appetite, the AUD, also suffered. With commodities falling, oil is down $11/bbl, while the index of industrial metal prices dived 6.7%, the AUD came under pressure falling 1.4% against the Pound, which now sits around AUD2.24, 2% against the Euro, and 5c against the USD since last week. It will take a rebound in metal prices, which in turn will take a reversal of the view on global growth, to give the AUD a boost, when the revised bail out bill finally get's through congress, which is possible by the end of the week, then we could see some rebound in risk appetite and as a consequence the AUD.
The fallout from the rejection of the Economic stability bill is likely to echo around the markets today, but we do also have the 3rd revision to GDP for the UK, which normally would be of little interest but if as expected it shows downward revisions to the previous few months then we could get into negative growth sooner than many expected. In the Eurozone we have a flash estimate of CPI and this is expected to show inflation still falling backwards in the Eurozone, down to 3.6% from 3.8%, which although still high should confirm the view that inflation has peaked.
Michael Corcoran | Treasury Solutions | nabCapital