Global Markets Week in Review: Turbulent Times

The Oxford Dictionary defines “volatility” as “liable to change rapidly and unpredictably, especially for the worse.” It’s not as if investors do not know this by now, as global stock markets were again subjected to extreme fluctuations during the past week.

The red line in the chart below shows the daily percentage change in the S&P 500 Index, illustrating the severe movements stock markets have seen in recent times.

Turbulence was rife as more data pointed to the world economy facing a longer and more intense downturn than feared. Continued financial trauma and a bleak corporate earnings outlook for at least the next few quarters also spooked battle-weary investors. They found little comfort in hints of additional interest rate cuts.

Global stock markets were beset by angst and plunged by more than 6% over the week in the case of the MSCI Word and Emerging Markets indices. The only safe havens for risk-averse investors were the U.S. dollar, developed-market government bonds and gold bullion. Unsurprisingly, the U.S. one- and three-month Treasury Bills declined to minuscule yields of 0.066% and 0.117% respectively.

Financial markets reacted badly to U.S. Treasury Secretary Henry Paulson’s decision to shelve plans to buy troubled mortgage assets, shifting the focus of the government’s TARP bailout plan to non-bank financial institutions and consumer credit. Priorities going forward are: 1) to strengthen the capital base of the financial system; 2) to provide support for securitization of credit-card receivables, auto loans and student loans; and 3) to explore ways of reducing the risk of foreclosure. Further dealings in Washington were concerned with the debate over whether to provide government aid to the U.S. auto industry in what looks to be a showdown among the lame-duck U.S. Congress, President Bush and the incoming Obama administration.

According to MarketWatch, Deutsche Bank analyst Rod Lache slashed his price target for General Motors (GM) from $4 to $0. Meanwhile, Richard Russell (Dow Theory Letters) pointed out: “Mattel (MAT) makes toy cars. Mattel is now worth more as a company than General Motors.” It gives one pause for thought.

An end to the credit turmoil does not seem to be in sight as AIG and Fannie Mae (FNM) reported huge losses, and renewed strains surfaced in the money markets after the U.S. Treasury’s decision not to buy toxic assets. The three-month dollar Libor rate ended a 23-day run of consecutive falls and edged up from 2.13% to 2.24% on Thursday and Friday.

In the spirit of the tumultuous times, a microbrewery in British Columbia is toasting the economic downturn by launching a special brand of recession-style beer, naming its brew “Bailout Bitter” in honor of the government bailouts, reported CBC News. Truly, a” bitter ale for bitter times!”

Next, a tag cloud of the text of the dozens of articles I have devoured during the past week. This is a way of visualizing word frequencies at a glance. As expected, keywords such as “market”, “economy” and “bank” feature prominently. “Gold” has also been receiving a fair bit of publicity as the yellow metal improved in price during the past week.

Back to Richard Russell for more wisdom from the venerable analyst:

This bear market is a bloody brute. I’m not trying to frighten my subscribers. What I am trying to do is to caution subscribers, and notify them that the lows for this bear market may still be far away. We simply do not know, nor do we have evidence to indicate that the bottom is in, or near. I continue to believe that the 2002 Dow low will be closely tested, and that the test will fail in that the Dow will break through the 2002 low of 7,286.

Regarding the shorter-term outlook, Michael Panzer (Financial Armageddon) commented:

It’s been said that markets do whatever is necessary to hurt the most people. That is why prices sometimes shoot higher when news flow, investor sentiment and speculative positions are skewed to the negative, and why rampant euphoria is occasionally the set-up for a violent correction. With that in mind, I still believe the path of least resistance for the equity market over the next month or two is up, in large part because bad news and increasing volatility have so many people worrying and thinking – and betting – otherwise.

A further positive for the bulls is that, according to Jeffrey Hirsch (Stock Trader’s Almanac), the Dow has been up 12, out of the last 14 years during the week before Thanksgiving.

I summarized my current views in a post (“Is Stock Market Rally ‘Real’”) on Friday:

Stock markets are caught between the actions of central banks, governments and the IMF frantically fending off a total economic meltdown on the one hand, and a worsening economic and corporate picture on the other. This situation has a ‘no-man’s-land’ feel to it. By all means try to play a possible nascent rally, but be cognizant that, failing further technical and fundamental evidence, you are trading against the primary trend. Caution is still warranted! (Also, read my post of Wednesday: “Stock Markets: Which Way José”.)

I will be donning my winter woollies and visiting New York City from December 3 to 7, 2008. There are still a few gaps on my itinerary for those wishing to meet me to discuss global financial markets, financial blogging or, for that matter, any moneymaking ideas. If you happen to be in the Big Apple at the same time, let’s get together and share a cup of coffee (or glass of wine).

Before highlighting some thought-provoking news items and quotes from market commentators, let’s briefly review the financial markets’ movements based on economic statistics and a performance round up.

Economic reports

The latest Survey of Business Confidence of the World conducted by Moody’s Economy.com, said:

Global business confidence continues to evaporate, as sentiment fell again during the first week of November to another new record low. Sentiment is extraordinarily negative everywhere, including heretofore stalwart Asia. The global financial panic, which hit in early September and has yet to abate, has been a body blow to global business confidence.

The global economy is now in recession according to the Survey.

Economic reports released in the U.S. during the past week confirmed the severity of the economic recession and included the following:

• Initial claims for unemployment insurance increased by 32,000 to 516,000 for the week ended November 8. This was well above expectations and could be an early indication that labor market slack is beginning to grow more quickly.
• Falling for a fourth consecutive month, total retail sales plunged by 2.8% in October, somewhat more than expected due to tumbling gas station sales and widespread weakness elsewhere. The October drop is the largest since record keeping for the current series began in 1992.

Weak retail sales set a poor foundation for the PCE component of the fourth quarter GDP report. Asha Bangalore (Northern Trust) commented as follows:

It is important to note that the boom in consumer spending has come to a screeching halt after an extended period of spending that began in the fourth quarter of 1991 and ended with the 3.1% annualized decline in real consumer spending in the third quarter (see chart below).

The drop in net worth of households resulting from declines in prices of homes and equity, the historically high debt levels of households and the debt service burden associated with the debt, the rising trend of the jobless rate, additional likely layoffs, and a serious lack of savings are factors that will hold back consumer spending.

Elsewhere in the world, economic reports showed an acceleration in the weakening of activity.

Notably, the 15-nation Eurozone entered its first recession since the launch of the single currency in 1999. The region’s third-quarter GDP shrank by 0.2% compared to the previous quarter, following a second quarter that also saw a 0.2% decline.

Europe’s largest economy, Germany, fell into a recession after government data showed that the economy contracted by 0.5% in the third quarter. This is the second consecutive quarter that the economy has shrunk after a 0.4% contraction in the second quarter.

GDP growth in the U.K. declined by 0.5% during the third quarter, and is the first official evidence that the economy is heading for recession and the first decline since 1992. The Bank of England’s GDP projection for 2009 was slashed, showing a low point of close to -2.0%, year on year from the previous forecast of +0.5%.

Further afield, Hong Kong became the second Asian economy, after Singapore, to officially tip into recession. Economic figures also showed worse-than-expected declines in output growth in China and Japan.

Week’s economic reports

Click here for the week’s economy in pictures, courtesy of Jake of EconomPic Data.

Date	Time (ET)	Statistic	For	Actual	Briefing Forecast	Market Expects	Prior
Nov 13	8:30 AM	Initial Claims	11/08	516K	475K	479K	484K
Nov 13	8:30 AM	Trade Balance	Sep	-$56.5B	-$56.0B	-$57.0B	-$59.1B
Nov 13	2:00 PM	Treasury Budget	Oct	-$237.2B	NA	-$134.0B	-$55.6B
Nov 14	8:30 AM	Export Prices ex-agriculture	Oct	-1.2%	NA	NA	-0.9%
Nov 14	8:30 AM	Import Prices ex-oil	Oct	-0.9%	NA	NA	-0.9%
Nov 14	8:30 AM	Retail Sales	Oct	-2.8%	-1.9%	-2.1%	-1.3%
Nov 14	8:30 AM	Retail Sales ex-auto	Oct	-2.2%	-1.0%	-1.2%	-0.5%
Nov 14	10:00 AM	Business Inventories	Sep	-0.2%	0.2%	-0.1%	0.2%
Nov 14	10:00 AM	Michigan Sentiment-preliminary	Nov	57.9	58.5	57.0	57.6

Source: Yahoo Finance, November 14, 2008.

In addition to the release of the minutes of the FOMC’s October meeting on Wednesday, November 19, next week’s U.S. economic highlights, courtesy of Northern Trust, include the following:

Other reports include the NAHB Survey (November 18) and the Philadelphia Fed Survey (November 20).

Click here for a summary of Wachovia’s weekly economic and financial commentary.

Go to part 2 - Global Markets Week In Review: Equities, Bonds, Currencies, Commodities>>

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