As unknowns lurk, don’t say ‘normalcy’ yet

Warren G. Harding (no relation) ran for the US presidency in 1920 on the memorable promise of a "return to normalcy". "Poise has been disturbed, and nerves have been racked, and fever has rendered men irrational," Harding said. What was needed was ". . . not nostrums, but normalcy; not revolution, but restoration; not agitation, but adjustment; not surgery, but serenity; not the dramatic, but the dispassionate; not experiment, but equipoise." After the harum-scarum of recent weeks, a return to normalcy has a beguiling appeal. There were tentative signs yesterday that the jitters in the financial markets are receding: the FTSE 100 closed up 109 points, the Dow rallied, too, and there were signs of the corporate credit market coming back to life. The banks underwriting the $40 billion of loans to fund the proposed acquisition by Rio Tinto, the UK-listed mining giant, of Alcan, the Canadian aluminium group, have managed to sub-underwrite the deal. For the first time in a few weeks there was news of the refinancing of a deal in the private equity sector: Electra, the quoted British buyout firm, agreed a $345 million refinancing with RBS for Allflex, which makes electronic tags for sheep, pigs and cows. Investors are flocking to Rio Tinto because it is a quality corporate borrower. Electra agreed to a higher cost of borrowing than originally planned. The developments yesterday suggested that investors are beginning to treat credit, once again, with the respect and judgment that it deserves. However, it is way too early to declare that normalcy has returned. Four of America’s largest banks visited the Federal Reserve’s discount window, which is where anxious financial institutions historically go for emergency funds. Two of the world’s largest private equity firms – KKR and Carlyle – have shelved plans for stock market flotations, scared off by the continuing uncertainty in the financial system. A large US mortgage lender announced that it was no longer offering new loans, putting yet another brake on the American housing market. Investors have taken comfort from the intervention of the Fed last week and the possibility of a cut to the funds rate next month. There is also an expectation that the markets will be further restored as people return from holiday and the pipeline of corporate borrowing reopens in September. However, the volatility will continue in the months ahead. There are so many unknowns in the market – teetering hedge funds, faltering US consumer spending, unravelling yen carry trades – that, beneath the semblance of normalcy, the anxiety remains.