US poised for rally as Scots fear crunch

STRATEGISTS in the US believe the recent stock market turmoil will prove a turning point in the financial crisis, though Scotland and the rest of the UK can expect the impact of the credit crunch to kick in later this year.

As the US awaits a slew of housing and consumer spending data this week, sentiment is growing among traders on Wall Street that the Bear Stearns crisis may have marked the nadir of the financial downfall, and that investors are likely to see the markets move along a flat trajectory for the rest of the year.

Some analysts feel that the US Federal Reserve's aggressive moves to cut interest rates and inject liquidity into the dried-up credit markets will soon pay dividends in the form of flat but not declining growth.

Mark Zandi, chief economist and co-founder of Moody's Economy.com, said: "This will be the bottom. We got an incredibly aggressive Fed and three to five years from now, we will realise that this was the start of a bottoming process."

According to Keith Wirtz, president and chief investment officer of Fifth Third Asset Management, investors are beginning to return to the equities market, and any unexpectedly good data over the next few days could result in a market rally.

He said: "There's a lot of bearishness built into expectations, so the markets could respond positively if we get any better-than-expected news from these economic reports. We are starting to buy equities this week."

James Clunie, investment director in the UK equities team at Scottish Widows Investment Partnership, said the markets would pick up when all the bad news is out. "We are certainly closer to a turning point," he said.

But many believe the crisis has some way to go and strategists in Scotland are signalling a downturn in the Scottish housing market, jobs and retail sector in the second half of this year unless there is a dramatic recovery in confidence and banks begin to reopen credit lines.

Frances Hudson, global strategist at Standard Life Investments, said: "Confidence in the financial markets is the biggest problem we have. While the US is close to recession the real economy has held up well. But the problems of higher fuel and food bills look like being with us for some time which might spell a leaner time."

Few investors expect this week's readings on the housing market and personal spending to be especially strong. But many hope the data shows at least a few clues that an economic rebound is on the horizon.

More than six months have passed since the Federal Reserve began lowering interest rates, usually the point when there is evidence that a rate cut is having an effect on the broader economy.

But Wall Street remains uneasy. "With the credit markets, every time you whack a mole in place, something else seems to pop up," said Bill Stone, PNC Wealth Management's chief investment strategist. But he added: "You get the feeling that you have a hard time making the case that the entire financial system is going to collapse."

The Fed has had a busy couple of weeks working to keep the ailing US banking system operating. It backed JPMorgan Chase's buyout of Bear Stearns, expanded its lending policies to more types of financial institutions, began accepting different types of mortgage-backed collateral and slashed its key federal funds rate.

The central bank's target for the fed funds rate – the rate banks charge each other for overnight loans – is now at 2.25%, its lowest point in more than three years. The Fed also lowered the discount rate, the interest it charges bank for loans, and encouraged investment banks like Lehman Brothers, Goldman Sachs and Morgan Stanley to borrow billions of dollars.

Wall Street finished sharply higher, encouraged by the Fed's moves as well as better-than-expected quarterly results from Lehman, Goldman and Morgan Stanley. The Dow Jones industrial average rose 3.43%, the Standard & Poor's 500 index increased 3.21%, and the Nasdaq composite index added 2.06%.

Apart from the slew of data, which analysts do not predict will show much recovery, Wall Street will have to watch commodities prices; crude oil and gold have retreated from record levels, leaving potential room for further rate cuts, but could certainly surge again.

Economic growth in the US looks set to stall during the second quarter as the country's economy moves "sideways", according to the Organisation for Economic Co-operation and Development. But the OECD stopped short of predicting a recession in the US.