The markets have taken comfort from the Fed’s energetic intervention, most recently the Bear Stearns rescue at the weekend and the loosening of Fannie Mae’s and Freddie Mac’s credit ceilings. Both institutions can now unload some of their mortgage assets and clean up their balance sheets. And it is not just the Fed that is getting involved. The ECB, Bank of England and Swiss National Bank appear willing to act upon the slightest indication of liquidity problems or wobbles from a major financial institution.

That said, and we should not forget the Fed’s magisterial 75bp rate cut, the markets are still highly nervous and professionals seem to be awaiting further corrections. According to our calculations, the S&P has already dropped by a maximum 18.6% relative to its highs, but the average correction in historical terms is 27% and in only three of the 11 cases we have analysed was the correction smaller than 19%. We therefore fear that another dip will degenerate into a major slide. European markets have corrected more violently, partly because of the euro’s strength. The biggest corrections of all have come in Asia, which we had hoped would be more resilient.

Read the complete Outlook >>