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Global Markets Roil in Uncertainty


Concerns about a U.S. recession again clouded the financial markets during the past week.


The stock market continued its downward trajectory during the past week, experiencing wild swings on the back of a barrage of bad news in the financial sector, and ongoing concerns about the housing and credit markets weighing on investor sentiment.

Bernanke's testimony before a congressional committee on Thursday reaffirmed the market's worries about the health of the economy. He admitted that the tumbling house prices, increased energy costs, falling consumer spending, increasing unemployment and weak stock market performance were more than likely to drag down U.S. economic growth. Bernanke expressed his support for significant fiscal and monetary stimulus as a pre-emptive strike against a U.S. recession. Despite these pronouncements the stock market plummeted by more than 300 points.

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On Friday President Bush broadly outlined a plan for roughly $150 billion worth of tax breaks, rebates and unemployment benefits to boost the slowing economy and help stave off a recession. This announcement, however, could not prevent stocks from sliding further, especially as concerns mounted that the downgrading of bond insurers dealing in credit default swaps could trigger another wave of huge debt write-downs.

"I hope I'm wrong, but I'm thinking that a large economic storm is building, and it's aiming to hit hard in the weeks and months ahead," said Richard Russell, 83-year old author of the Dow Theory Letters.

Let's briefly review the financial markets' movements during the past week on the basis of economic statistics and a performance chart.


Based on a recent CNN poll, it's clear that the priorities and worries of voters (i.e. consumers) are changing. In a November poll, 29% were worried about the economy, 28% were worried about the war in Iraq, 18% were worried about healthcare, 10% were worried about illegal immigration, and 12% were worried about terrorism. In the latest poll, 35% were worried about the economy, 25% were worried about the war in Iraq, 18% were worried about healthcare, 10% were worried about illegal immigration, and only 9% were worried about terrorism.

The bulk of the economic statistics reported during the past week, including soft retail sales, falling housing starts and a declining Index of Leading Economic Indicators, reaffirmed the U.S.'s economic woes and the precarious position of consumers. BCA Research summarized the implications for the Fed's meeting at the end of the month as follows: "While some FOMC members remain concerned about upside inflation risks, this will not prevent further major rate cuts. A stimulative Fed will not lead to an early improvement in the economy, but should cushion the downside."

Week's Economic Reports

Click to enlarge image

Source: Yahoo Finance, January 18, 2007.

This week's economic highlights include Initial Jobless Claims and Existing Home Sales on Thursday.


The performance chart obtained from the Wall Street Journal Online indicates how different global markets fared during the past week.

Click to enlarge image

Source: Wall Street Journal Online, January 20, 2007.

Concerns about a U.S. recession again clouded the financial markets during the past week and the subprime woes continued to unfold as more write-downs and depressed earnings were reported.

The bears made their presence felt and stock markets slumped across the globe with almost panicky selling being encountered. This is evidenced by the steep fall in both the MSCI World Index (-5.1%) and emerging markets (-6.4%). Under the circumstances, the Japanese Nikkei 225 Average did relatively well with a more modest decline of 1.8%.

The losses of the U.S. stock markets are mounting as illustrated by the following year-to-date returns: Dow Jones Industrial Index: -9.5%; S&P 500 Index: -10.4%; Nasdaq Composite Index: -12.5% and Russell 2000 Small Cap Index: -12.8%. The latter has declined by 21.5% since its high in July 2007, thereby now qualifying as being in a bear market as the "official" definition of a 20% decline has been met.

On the currency front, the Japanese yen gained strongly as a result of the reversal of the carry trade, putting pressure on a number of high-yielding currencies. The U.S. Dollar Index found slight gains on hopes that the White House's stimulus plan will help ease credit market problems. The euro, on the other hand, declined as expectations for the ECB shifted from holding rates steady to perhaps joining the Fed in cutting rates.

Government bond yields fell further around the world as the global economic outlook worsened and investors switched stocks to what is perceived to be a safe-haven asset class. In the U.S., the real 10-year bond yield traded at its lowest level since the 1970s.

Commodities, in general, came off their highs on the back of the economic slowdown and heavy profit-taking after the recent rallies. Agricultural commodities, however, continued their uptrend and posted a gain of 2.1% for the week.

No positions in stocks mentioned.
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