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

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Markets

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

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

Equities

Global stock markets suffered badly during the past week on mounting worries about the severity of the economic slowdown. The week’s movements - MSCI World Index -9.6% and MSCI Emerging Markets Index -11.8% - tell the story of a rough ride for bourses all over the world and marked a third straight week of losses. And the scoreboard would have been even worse if not for a dramatic late-session recovery in the US on the news that Timothy Geithner would be named Treasury Secretary.

Not a single developed market closed the week unscathed. Similarly, large losses also abounded among emerging markets, with the sole exception being the Shanghai Stock Exchange Composite Index that recorded only a relatively small 0.9% decline. The Index plunged by 72.0% since its high of October 16, 2007 until hitting a low on November 4, but has subsequently bounced by 15.4% to flirt with its 50-day moving average and roundophobia 2000 level. Will the upside leadership for global stock markets come from China on this occasion?

The chart below shows the performances of the four BRIC countries during the past week.

Click here or on the thumbnail below for a (very red) market map, obtained from Finviz, providing a quick overview of last week’s performances of global stock markets (as reflected by the movements of ADR stocks).

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The U.S. stock markets all declined sharply over the week as shown by the major index movements: Dow Jones Industrial Index -5.3 (YTD -39.3%), S&P 500 Index -8.4% (YTD -45.5%). Nasdaq Composite Index -8.7% (YTD ‑47.8%) and Russell 2000 Index -10.9% (YTD -46.9%).

The S&P 500 closed below its October 2002 low of 777 on Thursday, but Friday’s rally (+6.3%) to 800 put it back above this key support level. The Dow remained above its 2002 low of 7,286 on Thursday and closed 760 points above this level after Friday’s surge.

Click here or on the thumbnail below for a market map, also from Finviz.com, showing the performances of the various segments of the S&P 500 over the week.

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As far as industry groups are concerned, gold (+19%) was the top performer for the week, led by Newmont Mining (NEM) on the back of a sharp rise in the price of gold bullion.

On the other side of the performance spectrum, the industrial real estate investment trust (REIT) group (-40%) was the worst performer. The diversified financial services group (-38%) was the second worst performer, with each of the group’s large banks - Citigroup (C), JPMorgan Chase (JPM) and Bank of America (BAC) - dropping sharply. Investor concerns about future credit losses, valuations of “toxic” securities on the banks’ books, job layoffs and capital adequacy issues were the drivers for the declines.

David Fuller (Fullermoney) commented as follows on the outlook for stock markets:

… we have yet to see evidence of bottoming out on many major stock market charts. While this is worrying, to put it mildly, and sentiment is diabolical, investors should recall an extremely important behavioural conditioning process. The crowd has always turned progressively more bearish with each additional decline towards the eventual low for every bear market. This is inevitable as more people sell, and unfortunately, few are more bearish than a battered holdout who finally capitulates.

If global stock markets are not close to a major buying opportunity, then I suggest we should all head to sea and become Somali pirates.

Fixed-interest instruments

Government bond yields across the world plunged last week as spooked investors rushed out of equities into sovereign debt.

The ten-year U.S. Treasury Note yield declined by a massive 57 basis points to 3.18%, the U.K. ten-year Gilt yield dropped by 20 basis points to 3.87% and the German ten-year Bund yield fell by 30 basis points to 3.38%. However, emerging-market bonds, in general, lost ground as further deleveraging took its toll on risky assets.

The yield on ten-year Treasuries touched a 5½-year low (3.01%) on Thursday before rebounding by the close of the week, whereas the yield on 30-year bonds dropped to its lowest level (3.53%) since the start of regular issuance in 1977 before snapping back by 14 basis points.

U.S. mortgage rates also declined, with the 30-year fixed rate dropping by 9 basis points to 6.09% and the 5-year ARM also by 9 basis points to 5.89%.

A number of indicators show that the credit crisis is still severe. For example, credit default swaps that measure default risk for investment grade debt are trading at their highest levels of the bear market. This is seen from Bespoke’s index that measures default risk for 125 companies with investment grade debt ratings.

Currencies

The week’s feature among currencies was safe-haven flows into the U.S. dollar and Japanese yen as investors liquidated risky assets previously funded with these low-yielding currencies.

The Swiss franc came under pressure as the Swiss National Bank slashed interest rates a full percentage point to 1% as an emergency step to soften the economic slowdown.

The chart below illustrates the accent of the U.S. dollar and Japanese yen since September 15. (The U.S. dollar is measured against a trade-weighted basket of currencies, whereas all the other currencies are measured against the U.S .dollar.)

Emerging-market currencies had another bad week as a result of increasing risk aversion. Examples of losses against the greenback include the Brazilian real (‑10.4%), the Turkish lira (-4.5%), the South Korean won (-6.7%) and the South African rand (-4.4%).

RGE Monitor raised the question whether Bulgaria and the Baltic states will be forced to reset their fixed exchange rate pegs to the euro as a result of their large external imbalances and the global financial crisis.

Because of their fixed exchange rates, these economies cannot conduct independent monetary policy so the burden of macro-economic adjustment falls on fiscal policy.

Commodities

The Reuters/Jeffries CRB Index (-6.5%) witnessed a further decline amid fears of a protracted global economic recession and expectations that demand will drop.

Gold bullion (+6.6%) bucked the trend and surged as the yellow metal found support among nervous investors as a safe store of value. A report that China might embark on a gold-buying program provided an additional boost.

On the other hand, West Texas Intermediate crude declined by a further 13.3% to $49.9 - a level not seen since May 2005. OPEC meets on November 29 to consider additional production cuts.

The graph below shows the movements of various commodities over the past week - a continuation of the intense bear market that has been in force since the beginning of July.

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Lau-Tzu said:

Those who have knowledge, don’t predict. Those who predict, don’t have knowledge.

Wise words indeed, and may the markets bring you additional reason to celebrate a joyous Thanksgiving.

That’s the way it looks from Cape Town.

Comments

[investor88:]

Lau Tzu has the last word here: Those with knowledge don't predict, and those who predict don't have knowledge.

Isn't this what technical analysis is all about? Technicians say let the market tell you where to go, do not tell the market where to go. Of course this is as difficult as saying "buy low sell high", as it should be otherwise investment/trading won't be a art and a science and everyone would be rich.

Yet the world says techicians are intellectually empty headed, many jokes have been made of technicians like no one has meet a rich technician.

If investment is an art and a science, then why do so many say investment is a science and no art? As if scientific statements like "cash is trash", low pe, just buy and hold to eternity is a safe way to make you rich.

If one accept investment/trading as an art AND a science, then technical analysis has a basis as strong as value investing, buy and hold, low pe etc. We can't say technical analysis is intellectually empty.

2008 Nov 23 09:12 AM