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Troubled conditions did remain last week, not that it was too difficult to forecast the continuation of volatility in markets. Sentiment is fragile and it is hard to see confidence being restored soon.

There are signs that the credit crunch is beginning to bite. Banks appear unwilling to lend to each other, harbouring their cash as a protection against whatever problems might emerge in their own loan portfolio and to avoid exposure to rivals’ misjudgements.

A consequence has been a distortion of the short-term lending market. Overnight rates are pretty much in the hands of the central banks but three month inter-bank money has been soaring. It was not too hard to predict that the monetary policy committee would sit on their hands but the attitude of the European Central Bank was harder to gauge.

The liquidity problems assailing British money markets are also present in euroland. Acknowledging the problems inherent in the market, the ECB decided to leave rates on hold, despite having signalled that a hike was on the cards at the time of last month’s meeting. Central bankers are clearly nervous of upsetting a delicate situation. Why else would the Bank of England break with tradition and issue a statement when not changing the rate?

Of equal significance is the unremitting gloom coming out of the US housing market.

Sales of American homes have hit a six-year low. The statement from the National Association of Realtors was enough to send stockmarkets into reverse after some useful ground had been made up in earlier trading. If the great American public is too worried to spend their cash on houses they might cut back on spending elsewhere as well.

And there’s the rub. Is Fed chairman Ben Bernanke really staring a recession in the face? We will get a better idea what he is thinking next week when the open markets committee pronounces on US interest rates. Most money is riding on a quarter-point cut but Greenspan he is not. The famous Greenspan put, whereby the Fed regularly eased monetary policy to bail out the market is not believed to be in his armoury so a rate cut would mean he is truly concerned.

There is no indication yet that the turmoil in credit markets is affecting the wider economy but it is having an impact on the banking sector. Investment banks will be reporting third-quarter earnings in about a month’s time. Any provisions they make for losses and the statements that accompany the results will doubtless be pored over for clues as to the extent of the damage inflicted.

Back home, private equity veteran Jon Moulton has warned of the risks of contagion following the credit crunch. He believes the seeds of a major downturn have been sown. He is particularly critical over the lack of understanding on how many of the new credit instruments operated. Perhaps this is where the true problem lies. Nobody really understands where this crisis is heading or the final outcome.

We can take some comfort from otherwise robust signals emerging elsewhere. The firsthalf reporting season surprised mainly on the upside and dividend increases were better than had been expected. Commodity prices have held up well and all the indicators from the cargo shipping market suggest the global economy is being kept afloat by strong Asian demand. On that side of the world, the debt problem is not so apparent.

But the uncertainty remains and it is hard to see markets making much progress. Markets that lack stability do throw up opportunities, though, so stockpickers must be having a field day seeking out mispriced assets. Apparently, hedge funds and private equity groups are raising cash to buy distressed debt on the cheap. It’s an ill wind…

Brian Tora ( is principal of The Tora Partnership


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