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London (CNN) – You know things are bad when an email like this lands in your inbox:
Subject: is it time for a quick catch up?
Before the world expires…
The message takes on a new meaning when you realise it’s from the former head of one of the UK’s larger financial services companies.
As the eurozone crisis rages seemingly without end and big banks are being bailed out again, many are bracing themselves for a return of the pronounced recession that characterized the end of the last decade.
But is there evidence to support such a claim?
Economists at Deutsche Bank have done much of the number crunching for us. In a comprehensive presentation sent to clients this week, the lender’s research team put forward some sobering predictions.
Deutsche advises clients to brace themselves for the following:
-a mild recession in Europe
-no recession in the U.S. but anaemic growth nonetheless
-emerging markets growth will continue to "hold up well"
-the resolution of the eurozone crisis is likely to be "long and volatile"
Meanwhile stocks are looking cheap
Deutsche notes that stocks are looking increasingly cheap following the recent months of market turmoil with companies listed on the S&P 500 trading at a price of 12 times earnings versus 17 times earnings after the dot-com bubble burst in 2001-2002.
Having said that, shares haven’t fallen as much as they did 10 years ago when on average those on the S&P halved in value overnight.
So far so good. That is if you can cope with the volatility.
With trillions wiped off the world’s equity markets and 4% to 5% daily swings for the DAX, CAC40 and even the Dow, you’d be forgiven for thinking recent times have been historically volatile.
Yet the erratic movements again of the broader index –the S&P 500- as measured by the volatility index – or VIX- show that volatility peaked at 81 percent in 2008. So far this year we have only reached 48 percent. Mind you, volatility in European equities has been substantially higher.
Yet moving through the asset classes towards credit, the uncertain picture becomes more bleak.
The cost of insuring eurozone debt as measured by credit default swaps shows investors are pricing in what Deutsche calls "extreme" levels of default for the bonds of Europe’s banks and governments. Precipitating this situation: the fact that banks are increasingly wary of lending to each other.
Having said that, as long as the European Central Bank continues to make dollar funding available, Deutsche reckons it's unlikely the money markets will once again become as tight as they were during the credit crunch.
So credit is still out there to be had. But what about rates?
Across the eurozone Deutsche analysts estimate rates could come down by a quarter of a percent in November and at some point in the first quarter. Outgoing ECB President Jean-Claude Trichet was widely criticised for hiking rates too soon. His successor Mario Draghi takes the helm at the start of next month and may well want to make an impact.
As for the Fed, while the markets have concluded a third round of quantitative easing is now only a remote possibility, we could see a repeat of its ‘Operation Twist’ to bring down long-term interest rates.
Following the Bank of England’s surprise round of quantitative easing this month, Deutsche says we could well see another £50 billion being made available by February, though rates will stay on hold well into 2013.
It’s hard to say whether we are going back to our most recent recession.
The 2008-2009 financial crisis should have provided valuable lessons for world markets and leaders alike. Still, as any investor will know the small print on that prospectus always warns you that 'history is no guarantee of future returns.’
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