Global Markets Week In Review: Equities, Bonds, Currencies, Commodities

<< Return to page 1 - Global Markets Week In Review: Turbulant Times

Markets

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

Source: Wall Street Journal Online, November 14, 2008.

Equities

Stock markets experienced another wild week on the back of large swings in sentiment as investors focused on a more severe economic downturn and worsening earnings outlook. Developed and emerging markets alike closed a second straight week with significant losses, with the MSCI World Index down by 6.4% and the MSCI Emerging Markets Index losing 6.1%.

Among developed markets, the Nikkei 225 Average (-1.4%) fared the best, whereas some of the U.S. markets such as the Russell 2000 Index (-9.7%) and the Nasdaq Composite Index (-7.9%), Australia (-7.0%) and Canada (-5.6%) were at the bottom end of the performance rankings.

As far as emerging markets are concerned, Russia bore the full brunt of the selling pressure with a decline of 15.3%, taking its losses since the peak of about six months ago to a massive 74.1%. On the other hand, the Philippines (+3.0%) and China (+13.7%) were two of the few markets to register gains.

The Shanghai Stock Exchange Composite Index has bounced by 16.4% off its low of November 4 on the back of the Chinese government announcing a $586 billion economic stimulus package. This makes for an interesting-looking chart with the Index challenging its 50-day moving average and roundophobia 2,000 level. Also, the Chinese trailing price-earnings multiple has fallen from 45.9 to 14.3 – cheap for a country still seen as a top growth situation over the medium term.

The U.S. stock markets all declined over the week as shown by the major index movements: Dow Jones Industrial Index -5.0 (YTD -35.9%) and S&P 500 Index -6.2% (YTD -40.5%). The Dow closed 321 basis points (3.9%) above its October 27 low of 8,176 and the S&P 500 24 basis points (2.8%) above its low of 849.

The (predominantly red) market below was obtained from Finviz.com, and provides a quick overview of the performance of the various segments of the S&P 500 Index over the week.

click to enlarge

The bar chart below, also from Finviz, shows the U.S. sector performance for the past week, and specifically how defensive sectors such as utilities and healthcare outperformed on a relative basis.

A reason for Wall Street’s extreme volatility is the great uncertainty regarding the outlook for U.S. companies’ earnings. During the past week, Best Buy (BBY), the leading consumer electronics retailer, and Intel (INTC), the world’s largest semiconductor company, were key contributors to analysts’ concerns as both companies sharply reduced their forecasts.

Putting the stock market outlook in perspective, Jim Rogers was quoted by Bloomberg as saying:

Stocks in the West are still expensive on any historical valuation method, while bonds are going to be a terrible place to be for the next 10, 20 years.” Equities in the West will be “in a trading range for years to come.”

Fixed-interest instruments

Yields on government bonds, especially shorter maturities, declined during the past week as a result of escalating economic woes prompting safe-haven buying.

The two-year U.S. Treasury Note yield declined by 10 basis points to 1.24%, the U.K. two-year Gilt yield dropped by 39 basis points to 1.86% and the German two-year Schatz yield fell by 18 basis points to 2.23%. However, emerging-market bonds, in general, lost ground as further deleveraging took its toll on risky assets.

But not everybody was enamored with investing in bonds. Bill King (The King Report) posed the question:

Who will buy all the bonds that will be issued throughout the known universe in coming days?

U.S. mortgage rates edged higher, with the 30-year fixed rate rising by four basis points to 6.18% and the five-year ARM by six basis points to 5.98%.

The cost of buying credit insurance for U.S. and European companies increased as shown by the wider spreads for both the CDX (North American, investment grade) Index (up from 188 to 203) and the Markit iTraxx Europe Crossover Index (up from 762 to 813).

The three-month dollar Libor rate edged up on Thursday and Friday, limiting the week’s decline to 5 basis points from 2.29% to 2.24% – 124 basis points (compared to 43 basis points at the start of 2008) above the Fed’s target rate of 1.0%. The TED spread (i.e. three-month dollar Libor less three-month Treasury Bills) also perked up, indicating that credit strains are not quite back to normal yet.

Currencies

The week’s feature among currencies was the dramatic collapse of the British pound as the market factored in further aggressive easing of U.K. monetary policy and dumped the currency. Sterling dropped to a 13-year low against a basket of currencies and to its lowest level ($1.47) since 2002 against the U.S. dollar.

Over the week the U.S. dollar gained against the euro (+0.9%), the British pound (+5.8%), the Swiss franc (+1.4%), the Canadian dollar (+3.9%), the Australian dollar (+3.7%) and the New Zealand dollar (+3.9%). However, the greenback lost ground against the Japanese yen (-1.2%) as investors liquidated assets previously funded with low-yielding currencies such as the yen.

Emerging-market currencies had a torrid time as investors shunted risky assets. Examples of losses against the U.S. dollar include the Brazilian real (6.2%), the Turkish lira (-4.8%), the South Korean won (-5.3%), the South African rand (-3.2%) and the Russian ruble (-1.2%). The ruble lost 15.4% against the U.S. dollar over the past four months as the downturn in commodity prices negatively impacted the Russian economy.

Commodities

The Reuters/Jeffries CRB Index (-3.6%) witnessed a further decline on the back of an ailing economy and a slump in global demand for commodities.

Gold (+1.1%) bucked the trend and edged higher as some commentators punted the yellow metal as being poised for a rally.

On the other hand, West Texas Intermediate crude declined by a further 5.6% to levels last seen in the first quarter of last year. This has prompted OPEC to call an emergency “consultation” meeting on November 29 to consider a further production cut.

The graph below shows the movements for various commodities since the peak of July 2. Interestingly, the Baltic Dry Index, which is closely correlated with economic growth and demand for commodities, declined by 91.0%, over the same period.

Remember what John Kenneth Galbraith said:

The conventional view serves to protect us from the painful job of thinking.

That’s the way it looks from Cape Town.

Comments

[investor88:]

Overall there is volatility and uncertainty. Nimble traders can participate but no sustainable uptrend to be sure. More likely still a bear market.

2008 Nov 16 09:04 AM