It was another week of high drama for the global financial system and the stock markets. Just as it appeared that the credit markets have started loosening on the back of the new bailout plan, there emerged another cockroach in the kitchen.
Fears of a worldwide recession sent shivers down the market during the latter half of the week. Although the US markets did manage to close higher for the week, investors are unlikely to take home big confidence from this rally.
Contrasting trends were witnessed among global indices in the past week, an aberration that had indeed become rare in recent times. While key Asian markets with the exception of Japan ended lower for the week, their Occidental counterparts edged higher.
However, given the sharply intertwined nature of global capital flows, this ought to be a case of exception rather than the rule. India was amongst the worst hit with the Sensex coming off as much as 5% during the week.
After being rather reluctant to spend taxpayers’ money for buying stakes in banks, deteriorating credit market conditions have forced the US Treasury secretary to do exactly just that. We are talking of the new US$ 250 bn bail out plan that was set in motion by the government during the week.
Unless banks go into bankruptcy, the plan looks like a win-win situation for both government as well as bank shareholders. More importantly, it addresses the root cause of contraction in capital as the equity capital can now be leveraged 9-10 times over by the banks and hence, make possible that much more lending. The plan did seem to have the desired impact as interbank lending rates for major currencies did show signs of coming down by the time the week progressed.
Crude oil declined by 8% during the week to under US$ 72 a barrel. Gold prices slid by 8% to US$ 783 an ounce. Gold’s decline seemed to have been triggered by the speculation that investors are likely to book profits in the yellow metal to make up for losses in other markets.