Weekly Market Wrap Up, April 11-15, 2011

U.S. Approaching Borrowing Limit

The U.S. Treasury Department stated May 16th as the forecasted date when the nation’s $14.3 trillion borrowing limit will be reached. As of late, Congress has come under scrutiny and increased pressure to raise the debt ceiling before mid-May. If the debt ceiling is not raised and national borrowing reaches $14.3 trillion by this time, the Treasury will not be able to borrow money to finance government operations. President Obama expressed his concern over such a scenario stating that Congress’ failure to raise the debt limit “could plunge the world economy back into recession.” This pressure on Congress to come a consensus comes as House Republicans and Senate Democrats remain divided on the 2012 Budget Plan regarding national spending. The President believes that in order to raise the debt ceiling, he and Republicans must compromise on a spending plan for the 2012. However, Obama is confident Congress will eventually raise the limit.

Congress’ inability to raise the debt limit could destabilize world financial markets as U.S. treasuries around the world, considered to be the world’s most stable investment, would default as debt payments would cease. JP Morgan CEO Jamie Dimon stated that if the U.S. were to default on it’s obligations, the results “would be catastrophic.” Others such as Ben Bernanke, Nouriel Roubini, Timothy Geithner, and Obama’s Budget Director Jack Lew, have expressed concern as to whether the debt ceiling will be raised. The destabilization of the world’s financial markets resulting from U.S. default would be exacerbated by bond speculators (sometimes called “bond vigilantes”) who would rush to sell already held U.S. debt. On top of this, fear that the U.S. will not cut its deficit will give these investors more ammunition to sell their holdings. The perception of a less stable U.S. bond would result in demand for higher rates, leading to higher costs of borrowing and higher government deficits, something proponents of raising the debt ceiling are seeking to avoid.

– Shaun Hoyes

Bank of America’s income drops on mortgage losses

On Friday, Bank of America announced that first quarter revenue was down 39%. BofA attributes the loss to ongoing mortgage write downs and related legal expenses involved with foreclosures and investor lawsuits. Investors allege that they were sold securities backed by mortgages that were either fraudulent or simply of a lower credit quality than was represented at the time of sale.

BofA had announced three months ago a strategy to set aside over $1 billion in funds for legal losses and buy backs and to minimize exposure going forward. Investors took this revenue drop as a negative signal that the bank would continue to be weighed down by mortgage losses in the future and sent the stock lower over 2%. CEO Brian Moynihan admitted, “All the businesses have moved back to profitability except our mortgage business.” Bank of America, as the nations largest bank, provides an important glimpse into the ongoing problems of institutions who have large mortgage exposure among their assets.

– Chris Jones

Troubled Pound

For the last couple of months England has been facing an upward pressure on its inflation levels and this trend is expected to continue for the foreseeable future, especially as we approach to the summer. In order to combat this inflation force, the Bank of England has been stating to consider raising the interest rates. Currently interest is at a record low of .5 percent, England has established this level to stimulate the post crisis recovery.

In recent declarations Andrew Sentence, the Bank of England’s policy maker announced that “The UK is seeing more imported inflation than we would have if the pound was a bit stronger and therefore that’s reinforcing the squeeze on consumer spending.”

According to Bloomberg, “the British currency has lost about quarter of its value on a trade-weighted basis since the start of 2007”.

Mr. Sentence also declared that “My concern is that the pound has weakened beyond what is really necessary for the rebalancing of the economy and it’s actually contributing to inflation and making the macroeconomic management of the economy more difficult,” he said. “If a rise in interest rates began to counter some of that weakness of the pound, I wouldn’t see that as an unwelcome development in terms of controlling inflation.”

– Wellington Rodriguez

Article submitted by: Chris Jones, Shaun Hoyes and Wellington Rodriguez of the Capital Markets Lab (CML). To learn more about the Capital Markets Lab please visit https://business.fiu.edu/capital-markets-lab/.

About Capital Markets Lab

The Capital Markets Lab (CML) provides students, faculty, and the South Florida community with unparalleled educational and technological resources relating to finance. By utilizing the most current financial research platforms available, students are given an opportunity to supplement academic theory with the real world analytical tools used by leading financial institutions. Visit us at http://business.fiu.edu/capital-markets-lab/.

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