The government takeover of the US mortgage agencies ends the period of acute uncertainty surrounding these institutions.

Although a de facto nationalisation has always been the inevitable outcome of the crisis, the timing of such a resolution was previously unclear. As such, the weekend actions remove the risk that a continued policy stand-off would paralyse the availability of mortgage credit in the US.

Given the parlous and decreasing flow of private mortgage credit, Fannie Mae (NYSE:FNM) and Freddie Mac are critical ingredients for an eventual end to the decline in US house prices. The current pick-up in sales activity is a necessary prerequisite for an end to falling house prices, but for any pick-up in activity to be sustained, finance needs to be available. The bail-out therefore reassures on this score.

However, the agency rescue is far from being a universal economic panacea. The deal removes a sizeable tail risk from the system, but will do little immediately to offset the global economic slowdown. From both liquidity and capital perspectives, the US and European banking systems continue to convalesce, with bank credit expensive and scarce. Inasmuch as the bail-out reduces uncertainty about the depth of the US house price retrenchment, so the level of uncertainty surrounding banks' capital positions and the value of the impaired mortgage collateral has been reduced. This will help the long-run recapitalisation process and may start to solidify a floor in bank share prices. A further increase in bank bad debts from credit cards, commercial real estate and other financings is inevitable and the bail-out does nothing to alter this expectation.

Equally, European banks have their own potential problems with regional collateral. However, it is plausible that lowly bank equity valuations already discount these losses. If so, the removal of a significant tail risk from US housing should erode a key obstacle to the refinancing of bank capital positions.

But a restoration of the banking system to health is a long-run proposition. For financial markets over the next quarter or two, the more important issue is whether or not the global economic slowdown has reached the point of self-reinforcing weakness.

Business and consumer confidence has declined sharply around the world. Unemployment has risen abruptly in the US and hiring intentions have fallen in Europe.

However, a large part of the weakness that became visible in the second quarter must be due to the preceding shocking spike in energy prices, rather than the credit and housing crises. Universally, responses to consumer and business surveys show that inflation, rather than real estate values or credit availability, has been the main source of anxiety. So the fall in oil and other commodities since mid-July is a very important development.

Although we saw a reduction in bond marketinflation risk premiums after the decline in oil, the more pro-cyclical credit and equity markets were dogged by increasing concerns regarding global growth. Undoubtedly, the travails of the mortgage agencies were a significant, but not sole, ingredient in these concerns. The combined effect of lower energy prices and a rescue of Fannie and Freddie should therefore offer some counterbalance to market pessimism.

But it is not yet clear that the risk of self-reinforcing cyclical weakness has been decisively allayed. Given the background of de-leveraging and very fragile financial institutions, such risks have much more negative downside potential than usual. So do not expect any dramatic inflexion point in market trends just yet.

Certainly, the risk of much lower equity prices and much wider credit spreads would seem to have been thwarted. But a sustained recovery in cyclical asset values depends on a clearer confirmation of a bottom in US real estate trends, together with a recovery in global business and consumer confidence. Such developments are probable but not yet inevitable. For investors, a cautious increase in equity risk exposure and careful bottom-fishing in impaired assets is the appropriate response.

Tim Bond is head of global asset allocation at Barclays Capital

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