Banks airing their dirty laundry helps ease market anxiety

Whilst the losses within the financial system from the credit squeeze have become more measurable this week with poor news flow from some major banks, the full impact on the real economy is still unknown.

Ted Scott, manager of the F&C UK Growth & Income Fund, said this week's billion dollar losses announced by Deutsche Bank and profit warnings from UBS and Citigroup amongst others, had shed more light on the extent of the crisis emanating from the US sub-prime market but in doing so had actually helped ease market anxiety.

"The comments we are hearing from investment banks are that the problems within the financial system are all out in the open now. This has undoubtedly given some support to the rally in markets this week. However, many investment banks have also announced redundancies, tempering employment expectations in financial markets, the impact of which could feed through to the economy," said Scott.

According to Scott the gains in financial markets are in stark contrast to increasing evidence of an economy in slowdown.

"This week's interim results from Barratt Developments, one of the UK's largest housing developers, were weaker than expected and margins are likely to come under pressure going forward. We believe this implies weakness in the overall housing market as evidenced by today's Halifax House Price Index, in which house prices fell by 0.6% in September. This marks a continuation of the downward trend in house prices since the end of last year," he added.

Today's decision by the Bank of England to keep interest rates on hold, although largely expected, also provides further support to the argument that UK economic growth is slowing.

"I believe the Bank of England will want to see how the consumer holds up over Christmas before it considers cutting interest rates. Nevertheless, there is no doubt that with the fall in CPI to 1.8% and the slowdown in the housing market, the prospect of a cut in rates has come closer," concluded Scott.