A peek at stock and currency markets in 2008

Tuesday, October 14, 2008

Global stock markets are rebounding
The chart illustrates daily index values for several world stock indices, where each index value has been based to 100 for comparison. Key stock markets in developed economies peaked at the end of May 2008, when the price of oil was increasing propitiously, and with it, the economic outlook. Consumer, firm, and investor angst grew, and the sell-off began.

China’s Shanghai Stock Exchange has been declining since the beginning of the year. Emerging markets, where food and energy costs are a large share of the total cost of living, really suffered during the period of food and energy inflation. On the other hand, the Canadian TSX performed relatively well underscored by strong commodity revenue growth, but has likewise, declined amid the global banking crisis.

As oil increased and peaked above $145/barrel in July, stock indices continued to decline with the global inflation surge. However, the real troubles started in mid-September, following the bankruptcy of Lehman Brothers and the onslaught of the global banking crisis. Even Canada, with its rating of “the world’s soundest bank system”, suffered as expected earnings declined quickly with global commodity markets.

Finally, some relief. From Reuters:

"LONDON (Reuters) - Global investors piled into equities for the second day in a row on Tuesday, dumping relatively safer assets as they took comfort from concerted efforts by governments to shore up the financial system. Much of the trading was unwinding panic moves from last week when fears about the worst financial crisis in nearly 80 years swept across the world.

European shares were following Asia sharply higher, rising around 4 percent. Japan's Nikkei, which was not traded on Monday because of a holiday, gained more than 14 percent. MSCI's main world stock index was up more than 3 percent, gaining more than 12 percent for the week to date after plunging 20 percent last week. Its emerging market stock counterpart (.MSCIEF was up 5.2 percent, adding to Monday's 7.4 percent gain.

Investments seen recently as relatively safe compared with stocks -- the Japanese yen and government bonds -- fell.

"There's relief that banks probably won't go bankrupt thanks to the capital injection plans," said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments in Japan.

The United States will announce plans later in the day to inject $250 billion into its banks, following similar moves by Britain, France, Germany and others on Monday.

Japan also joined the global push, saying it could inject public funds into regional banks to make sure small firms can get cash.

The pan-European FTSEurofirst 300 index was up 4 percent points after its strongest one-day percentage rise on record -- 10.1 percent -- on Monday.

"Market players are hoping that the crisis has reached a turnaround point thanks to the extensive aid programs," German bank Helaba said in a note.”"
And the $US rode a great wave that may be over

The chart illustrates daily currency values, where each index has been based to 100 for comparison. The currency markets behaved differently than did the global stock markets. The outlook on inflation – which affected global stock market values – did not play a strong role in global currency markets, as inflation rates across the globe grew in tendem. Even as oil prices peaked, where world oil is quoted in $US, the value of the $US rose against key currencies. The Federal Reserve was cutting rates sharply, while key economies (Canada, U.K., Eurozone) engaged in little, if any, expansionary policy, and the $US remained stable on the US's more sanguine outlook.

As soon as soft Q1 numbers were released for key global economies (Canada, U.K., Germany), the value of the $US swelled. It wasn’t so much a function of US strength, but rather the weakening of key economies in Western Europe and Asia. The second wave of $US strength occurred when the banking crisis showed its scary face. The Federal Reserve Bank and US Congress played a key role with their quick and pre-emptive attack on the banking crisis, and in fact, the European banking system was/is arguably worse off than the U.S. banking system. As soon as Europe showed their joint commitment to stabilizing the aggregate banking system, relative confidence grew and the $US dollar fell (yesterday).

Are we back to basics? The global outlook improved (however slightly), and investors seek the higher relative return, selling off $US. Nope. Global investors are fleeing to those markets with the strongest government bank guarantees, and as of yesterday, Europe was winning the horse race.

Hopefully, the banking crisis has subsided and investor confidence has – at least for now – re-emerged. 15 banks have failed since the year started, and more are expected, but for now, I’ll let Paul Volcker speak for the consensus. From Bloomberg:
Former Federal Reserve Chairman Paul Volcker said an almost inevitable recession in the U.S. would be made ``more manageable'' by government plans to invest $250 billion in American banks.

The bailout measures were ``distasteful'' and ``not consistent with a capitalistic system,'' Volcker said at a lecture in Singapore today. ``But however distasteful, they are necessary to restore stability to the financial system.''”

Rebecca Wilder


Janie October 14, 2008 at 11:35 AM  

Nice set of charts - really shows what is happening in the world. Finally, someone said that the $$ going to the 9 banks can't just bolster their bottom lines. It was a hole big enough to sail a battleship through. Funny how it had to be clarified and was not in the documents. Will that set up the dollar again to be the "go-to"?

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