Global Markets Week in Review: Stock Market Shrugs Off Bad News

Despite a litany of bleak economic and corporate news confronting investors during the past week, global stock markets digested the bearish fodder with a sense of aplomb. The MSCI World Index and the MSCI Emerging Markets Index gained 4.4% and 10.9% respectively on the week, with other reflation trades such as gold (+9.1%) and oil (+20.4%) also putting in a strong performance.

But investor angst was never completely allayed as seen from the yields on U.S. one- and three-month Treasury Bills briefly trading in negative territory for the first time since 1940, indicating the willingness of risk-averse investors to pay the government for the “privilege” of holding their money. Three-month T-Bills ended the week in positive territory but barely so at a minuscule 0.036% yield, indicating that liquidity was still being hoarded. (Also see my “Credit Crisis Watch.“)

Source: Nick Anderson, Slate

The week kicked off on a positive note after U.S. president-elect Barack Obama had spelled out his plans on Sunday for the biggest infrastructure investment in the U.S. since the 1950s. According to CNN, Obama said:

We understand that we’ve got to provide a blood infusion to the patient right now to make sure that the patient is stabilized. And that means that we can’t worry short term about the deficit [which might surpass $1 trillion before his spending plans are included]. We’ve got to make sure that the economic stimulus plan is large enough to get the economy moving.

Bill King (The King Report), remarked:

The resultant infrastructure and physical assets will be far better than endowing busted banks, insurance companies and other financial entities with US taxpayers’ cash, which effectively goes down a black hole.

Financial markets reacted negatively to the U.S. Senate’s failure to agree on a $14 billion loan to the troubled automakers. The prospect of the biggest industrial failure in U.S. history caused a sell-off on global stock markets, a widening of credit spreads and an onslaught on the U.S. dollar.

However, the U.S. Treasury was quick to signal its readiness to provide funds to prop up the “Big Three,” as quoted in the Financial Times:

Because Congress failed to act, we will stand ready to prevent an imminent failure until Congress reconvenes and acts to address the long-term viability of the industry.

This indication resulted in an improved tone on financial markets by the close of the week.

Next, a tag cloud from the plethora of articles I have devoured over the past week. This is a way of visualizing word frequencies at a glance. Key words such as “credit,” “debt,” “economy,” “Fed,” “government,” “market,” “rates” and “stock” occur often, but “gold” is also becoming increasingly prominent.

Back to the issue of markets shrugging off bad news for the second week running. Richard Russell (Dow Theory Letters) commented as follows:

On top of everything else, Lowry’s Selling Pressure Index dropped substantially yesterday [Wednesday] and is now in a definite declining trend. At the same time, Lowry’s Buying Power Index is trending higher. Thus, the odds are saying that the trend of the stock market is turning up.

This is all the more dramatic since this potential upturn has arrived in the face of black-bearish news. Markets bottoming and rising in the face of bearish news are often the most profitable ones. I have never seen a bear market hit its low amid happy news headlines.

On a fundamental note, 39% of the constituents of the MSCI World Index sell at a discount to shareholders’ equity.

In an interview with Bloomberg, Jean-Marie Eveillard said:

The cash-rich companies allow investors to pay nothing for future earnings streams.

A positive for the bulls is that the period post-Thanksgiving through the end of the year has usually been a bullish time for stocks, based on studies by Jeffrey Hirsch (Stock Trader’s Almanac). Should the bullish seasonal tendencies provide a tailwind on this occasion, possible first targets are the 50-day moving averages of 8,784 for the Dow Jones Industrial Index (current level 8,630) and 910 for the S&P 500 Index (current level 880).

The last word on equities goes to Hong Kong-based Puru Saxena:

I cannot say with any certainty whether we are already in the early stages of the next cycle. Under my best case scenario, we are in the very early stages of a new multi-year bull market. And under my worst case scenario, we are going to get a very strong rebound (30% move higher in the S&P 500) over a short period of time, which will probably take the markets back to their 200-day moving averages.

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

Economy

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

Global business confidence has been shattered. Sentiment is equally negative in North America, South America and Europe. Asian business confidence is not quite as dark, but it is falling rapidly. Pricing power is quickly evaporating and approaching that which prevailed in 2003, the last time deflation was a concern.

According to the survey results, the global economy is suffering a severe recession.

Economic indicators released in the U.S. during the past week mostly pointed to a deepening recession.

BCA Research said:

The year-end spending season will be the biggest bust in several decades, as consumers have been hit by a double whammy: a meltdown in financial and residential asset prices; and a sharp rise in layoffs. The government’s failure to deliver a fiscal stimulus plan and unfreeze the credit markets imply that the recession will deepen and any recovery will be pushed farther into the future.

The contraction in payrolls and economic growth will persist until there are some signs that policy actions are finally becoming effective. The fiscal stimulus plan needed to stabilize the economy will be massive and policy rates will stay near zero for a long time.

The precarious position of the U.S. consumer is illustrated by a plunge of 21.9 points to 63.7 in the annual average of the University of Michigan Consumer Sentiment Index - the largest annual average decline in the history of the Index which began in 1952, according to Asha Bangalore (Northern Trust).

Click to enlarge

The Fed fund futures are pricing in a 76% chance of a 75 basis-point cut in rates from 1.0% to 0.25% when the FOMC meets on December 16.

However, Bill King questioned the Fed’s approach:

[Effective] Fed funds traded at zero late last night. We have screamed for months that the official or ‘target’ Fed funds rate was irrelevant because the effective funds rate was much lower, and near zero. Now Fed funds are trading at zero. Yet there will be pundits and experts that will assert that the Fed might cut its target funds rate this week to 0.50% or even 0.25% - even though the cut in the target rate is meaningless. Now that the Fed is paying interest to banks, why did the Fed allow the funds rate to trade at zero? Yep, they are terrified by something.

Also, the Fed is considering issuing its own debt to further expand money supply without clogging up bank balance sheets and making it harder for the Fed to maintain interest rates at the desired level. RGE Monitor said:

… there are upper limits to Treasury issuance and lower limits to the amount of Treasuries the Fed can sell off from the asset side of its balance sheet. One hurdle to issuing Fed bills: The Federal Reserve Act doesn’t explicitly permit the Fed to issue notes beyond currency.

Elsewhere in the world, economic reports compounded anxiety about a severe global recession. Specifically, Chinese exports in November declined by 2.2% from a year earlier as a result of a drastic slowdown in demand in many of its main markets. The figures were far below forecasts and the +19% figure for October.

In a report in the Financial Times, Isaac Meng, an economist at BNP Paribas said:

This is the worst collapse in Chinese exports since 1999 and is probably just the beginning of a prolonged export contraction.

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
Dec 9	10:00 AM	Pending Home Sales	Oct	-0.7%	-	-3.0%	-4.3%
Dec 10	10:00 AM	Wholesale Inventories	Oct	-1.1%	-0.2%	-0.2%	-0.4%
Dec 10	10:35 AM	Crude Inventories	12/06	392K	NA	NA	-456K
Dec 10	2:00 PM	Treasury Budget	Nov	-$164.4B	NA	-$171.0B	-$98.2B
Dec 11	8:30 AM	Export Prices ex-agriculture	Nov	-2.9%	NA	NA	-1.3%
Dec 11	8:30 AM	Import Prices ex-oil	Nov	-1.8%	NA	NA	-0.9%
Dec 11	8:30 AM	Initial Claims	12/06	573K	520K	525K	515K
Dec 11	8:30 AM	Trade Balance	Oct	-$57.2B	-$53.5B	-$53.5B	-$56.6B
Dec 12	8:30 AM	Core PPI	Nov	0.1%	0.1%	0.1%	0.4%
Dec 12	8:30 AM	PPI	Nov	-2.2%	-2.1%	-2.0%	-2.8%
Dec 12	8:30 AM	Retail Sales	Nov	-1.8%	-2.1%	-2.0%	-2.9%
Dec 12	8:30 AM	Retail Sales ex-auto	Nov	-1.6%	-1.9%	-1.8%	-2.4%
Dec 12	10:00 AM	Business Inventories	Oct	-0.6%	0.0%	-0.2%	-0.4%
Dec 12	10:00 AM	Mich Sentiment-Preliminary	Dec	59.1	58.0	55.0	55.3

Source: Yahoo Finance, December 12, 2008.

In addition to interest rate announcements by the FOMC (Tuesday) and the Bank of Japan (Thursday), next week’s U.S. economic highlights, courtesy of Northern Trust, include the following:

1. Industrial Production (December 15): The 1.4% drop in the manufacturing man-hours index in November suggests a 1.0% decline in industrial production. The operating rate is projected to have dropped to 75.7. Consensus: -0.8%; Capacity Utilization: 75.7 versus 76.4 in October.

2. Consumer Price Index (December 16): A 0.7% decline in the CPI is forecast for November versus a 1.0% drop in October, reflecting largely lower energy prices. The core CPI is expected to have moved up by 0.1% after a 0.1% decline in October. Consensus: 1.3%, core CPI +0.1%.

3. Housing Starts (December 16): Permit extensions for new homes fell by 9.2% in October, inclusive of a 12.6% drop in permits issued for single-family homes. These figures suggest a sharp drop in housing starts (730,000). Consensus: 740,000 versus 791,000 in October.

4. Leading Indicators (December 18): Interest-rate spread and money supply are the only two components likely to make a positive contribution in November. Stock prices, initial jobless claims, manufacturing workweek, consumer expectations, vendor deliveries, and building permits are expected to make negative contributions. Forecasts of money supply and orders of consumer durables and non-defense capital goods are used in the initial estimate. The net impact is a 0.5% drop in the leading index during November, assuming building permits fell. Consensus: -0.5 %

5. Other reports: NAHB Survey (December 15), Current Account (Q4) (December 17), Philadelphia Fed Survey (December 18).

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

>> Go to Page 2 - Global Markets Week in Review: Equities, Bonds, Currencies, Commodities

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Comments

[Tampa DDS:]

The "Credit Crisis Watch" article/link was very good.

2008 Dec 14 05:28 PM