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Market turbulance enters its third phase, says BlackRock

Turbulence in the financial markets has entered its third phase, with investors trying to understand the economic and profit consequences of the higher cost of capital and tighter credit conditions, says BlackRock.

BlackRock vice-chairman and chief investment officer for global equities Bob Doll says the first phase occurred when investors became aware of the losses in the U.S. mortgage markets and the second was marked by a significant reduction in risk and a withdrawal of liquidity as investors began trying to reduce their exposures to these markets.

He says: “As we noted last week, attention is now heavily focused on the Federal Reserve and, specifically, on what actions the central bankers may take to help stimulate growth and facilitate more normal trading in financial markets.

Doll says he expects the US Fed to cut the target rate by at least 25 basis points at its next meeting on September 18.

He says: “The debate has shifted in most quarters from wondering whether the Fed will cut rates to trying to determine how far it will cut them. Global credit markets still are not functioning properly, which has been prompting action by central banks around the globe. Most (including the Fed) have continued to inject liquidity into the markets in an effort to normalise private sector lending, but so far have had limited success.

“In our minds, the implication is that a more forceful change in policy could be warranted to prevent the U.S. economy from potentially sliding into recession.”



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