President Obama outlines his first US budget this week, but all markets want to know is whether his government will nationalise the two leading US banks, Citigroup and Bank of America.
Despite the importance of the budget and its policy outline, the health of the US banking system remains the big issue for investors and helped send markets to 12 year lows at one stage on Friday on the Standard & Poor’s 500, the Dow to a six year low and other bourses around the globe to multi-year lows.
President Obama said at the weekend (and in briefings from his administration to the media) that he will set a goal this week of cutting the annual American budget deficit by nearly two-thirds by the end of his term.
This would largely be financed by slashing spending on Iraq and higher taxes on the wealthy.
The President releases the budget on Thursday and he is also expected to maintain his intention to deliver this year on campaign promises on healthcare and energy policy.
Mr. Obama inherited a deficit for 2009 of about $US1.2 trillion, which will rise to more than $US1.5 trillion, given initial spending from his recently enacted stimulus package.
The New York Times reported that the budget blueprint for the 2010 fiscal year, which begins October 1, will include a 10-year projection showing the annual deficit dropping to $US533 billion in the 2013 fiscal year.
That’s roughly where it was at the end of the September, 2008 US budget year.
Given the recession, that will be tough, especially if his government has to buy up the major banks (and some of the struggling regional banks as well).
The 14th bank of the year was closed on Friday night in the US, a small local bank in Oregon which had just over $US130 million in assets. It was the quietest Friday night in a month. 25 banks were closed last year.
It emphasised the continuing pressure on US banks large and small and the fact that until that is relieved, nothing will happen in the US economy to reverse the spiral.
Despite assurances from the White House on Friday that US banking is sound (yeah!), shares of bank companies plunged to new lows Friday on those nationalisation fears.
Both banks said they were fine and would remain independent after a seemingly casual remark by Democrat Senator Christopher Dodd (head of the Senate Banking Committee, which gave his comments a status they wouldn’t have had normally) that the US administration might assume ownership of certain banks for a short time.
No go said the Obama Administration, but the comments and the sentiment on Wall Street coincided to send bank shares lower and drag the indexes down.
After the denial from the government, Wall Street recovered some of the lost ground, but it was an ugly reminder of how fraught the situation remains.
Yesterday, Reuters reported that more detail on the banking bailout package will emerge this week with the outline of the stress test for the 14 major banks to be filled in.
Reuters reported that if US banks are found to need additional capital, financial authorities will provide them with an "extra cushion of support".
The tests are aimed at making sure the banks can withstand a more severe economic climate and can maintain the flow of credit to the wider community.
Initial plans for the stress tests were announced February 10 as part of the bank stabilization plan. It now seems that to get the extra capital, if needed, the banks have to sign up to the stress test idea.
Some US banks (such as Well Fargo, JP Morgan and Goldman Sachs) have been muttering about freeing themselves from the government by handing back their capital injections received last week.
Reuters reported that little is known about the form of the stress tests, but one source described them as "consistent, forward looking and conservative".
European banks also suffered and the FTSE Eurofirst 300 recorded a weekly fall of 7.3% as it hit its lowest since March 2003, when the second Iraq war started.
It was the biggest fall for two months and the Dow Jones Stoxx 600 Index also fell to its lowest level since March 2003.
The index fell 7.5% to be down 11% so far this year. Technically that is a correction from its late 2008-early 2009 surge.
In Tokyo, the Nikkei 225 Average fell 4.7%.
The Australian stock market ended the week firmly in the red, down around 4%.
The MSCI Asia Pacific Index dropped a nasty 7.0% last week, the steepest slide since the period ending last October. It’s down a worrying 15% this year and is less than 2% from a six-year low.
South Korea led the region’s declines with an 11% fall in the Kospi. Hong Kong’s Hang Seng fell 6.3% over the week.
The MSCI Emerging Markets index dropped 8.5% – its worst week since November.
Asian markets worried over the US and the region’s continuing powerful contraction.
This week it will be more of the same, with eyes on America and the release of more details of the bank rescue package
Citigroup fell by up to 36% on Friday, bounced, but still closed under $US2 for the first time in years.
Bank of America Corp also dropped by 36% before recouping most of the drop after Chief Executive Officer Ken Lewis said in a leaked memo that the bank can survive “on our own".
Citigroup dropped 22% to an 18-year low of $US1.95 after sinking to as low as $US1.61.
Bank of America fell 3.6% to $US3.79, its lowest closing price since 1984, and slumped to as low as $US2.53.
The S&P 500 fell 1.1% and the Dow fell 1.3% after being down nearly 3%.
The S&P 500 tumbled 6.9% last w
