Don't bank on a turning point for markets yet

The Fed's $700bn financial bail-out may have avoided a meltdown on Wall Street, but the payback for the boom years will drag on. While the financial sector should be much healthier once it gets the toxic assets off its books, it is still in a critical condition.

Last week was "completely insane", says Edmund Shing of BNP Paribas. Credit markets virtually seized up and equities plunged early in the week amid the failure of Lehman Brothers and the Fed's rescue of AIG. On Wednesday, the news that a supposedly ultra-safe money-market fund had lost money on Lehman debt sent the yield on four-week Treasury bills below zero, even lower than in the Great Depression. Investors were paying Uncle Sam to hold their money.

By the end of the week markets were posting record-breaking rises after the US authorities announced a $700bn bail-out of the financial sector and both Britain and America banned short selling of financial stocks (see below). Early this week uncertainty over the details of the plan dented confidence in equities and interbank rates remained elevated, while the cost of the bail-out plan it could add 4%-8% to the American budget deficit fuelled worries over the US government's finances and wiped over 3% off the dollar-euro rate.

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