World Equity Markets Take Two Steps Forward and Two Steps Back

It was a case of two steps forward and two steps back last week for world equity markets. Global equities were served a reminder of just how difficult bear markets can be. Traders are quick to grab whatever short term profits they have made, making it difficult for rallies to build momentum. Equities shot out of the starting gate in the early part of the week, largely due to a relief rally in the banking sector.

The clear catalyst was the announcement from Barclays that it won't be going to the market or government for more cash. This, more than anything strengthened investors' confidence in Barclays (BCS) and across the sector as a whole. However, as impressive as today's performance is, the rally needs to be put in context. Shares in Barclays are still around 50% lower than they were just two months ago.

It wasn't plain sailing though, with severe selling towards the end of the week. This time, the worry wasn't specifically related to complex financial deficits. Fears were more in relation to general analysis that banks are not the place to be in during a recession. With house prices continuing to plunge on both sides of the Atlantic, rising unemployment and an increased risk of default on loans, the recession itself is enough to put pressure on banks. This is before you take into account their dire capital adequacy positions.

U.S. house prices are continuing to plumb new depths. The 10 and 20 city indices are down over 25% from their peak and over 18% on last year. House prices are now back to 2004 levels with further to go if the current trend line is anything to go by. Near record U.S. jobless claims and record lows in levels of housing starts go hand in hand as job security fears cause home owners to make do with what they have and stay put. The inability to get mortgages on reasonable terms is of course a significant factor.

Adding to the considerable volatility was the number of U.S. companies announcing earnings that fell below analysts' expectations. 'Make do and mend' is a view that many shunned during the boom years, but slowly but surely, western consumers are coming round to the idea of keeping their affairs on a tight budget.

Microsoft's (MSFT) business model largely depends on individuals and businesses buying new computers with upgraded versions of its software installed. With the economic slump starting to bite, consumers are making do with their existing machines or sourcing machines from the very bottom of the range. Last week, Microsoft's share price skirted with the November lows, which in turn is the lowest point since 2000. On the other hand, buoyant sales numbers from Apple (AAPL) indicate that like holidays, the iphone & ipod are luxuries that shoppers aren't prepared to let go of just yet.

The coming week is full of top tier economic announcements with Friday's Non Farm Payroll numbers top of the pile. Wednesday's ADP employment change will provide a good steer for Friday's numbers. Aside from this we have the rate statement from the MPC on Thursday, with analysts expecting a cut down to 1%. Speculation is also rife that the ECB will follow suit with a cut just 45 minutes later. The Euro was down hard against the pound last on speculation that the European Central Bank now has now choice but to follow either the U.S. and U.K. and cut towards 1%.

The Euro/ U.S. dollar exchange rate has been relatively range bound over the last three months after a sharp fall starting in August. With the Eurozone potentially having further to go in terms of cutting rates, we could see the euro fall further against the dollar. No world economy is in particularly brilliant shape at the moment, but arguably, the Eurozone may come under further pressure over the next year as its member stats contract at wildly different rates of acceleration.

Credit Default Swaps are used as a measure of a particular country's risk of defaulting on its loans. The score is the cost of insuring $10,000 worth of debt over 5 years. Last week the U.S. was at 75, while France and Germany were at 68 and 59. This might theoretically imply that the Eurozone was in better shape. Unfortunately the risk of other Eurozone nations defaulting is much higher. Ireland's risk level was 285, Greece 283, Italy 184 and Portugal 145.

Comments

[OldLimey:]

Of course the Anglo-American media blitz against the EUR will continue. After all, any threat to the USD's primacy as the world's reserve currency - no matter how distant that threat - has to be addressed because that primacy is pretty much all that separates the US from outright default on its foreign debt. But could somebody, after they've hit the thumb's down of course, explain this to me: why does the potential default of Ireland or Greece pose a threat to the viability of the EUR when the obvious bankruptcy of California (one of the world's top ten economies) is immaterial to the upward march of the USD?

Feb 03 01:46 PM

[sorgmot:]

Modern governments all look alike. There are two parties which run slates of candidates for election so that the party that wins an election takes over all government powers and uses those to reward the entities that put up the money for it to use in the campaign leading up to the election.

Of course, the elected body loots the ship of state for themselves and their backers. Backers are monopolies and cartels which use parts of their booty to payoff elected official and their family members.

This model always leads to

1, increased percentages of impoverished in the population,
2. small numbers of super rich citizens in the population,
3. slow or no growth in the overall business in the population,
4. price inflation, and
5. slow growth or actual declines in living standards for the vast majority in the population.

The bottom line is that the vast world wide collapse now under way will continue for years and years.

Everywhere and in total, debt obligations on assets exceed those assets' values in local currencies.

Thus, local currencies are locked up and worthless.

California is in default to its taxpayers, now.

Great work, Arny!


Good luck.

Feb 03 02:24 PM

[RomanFinancial:]

I gave you a thumbs down as I am from California, and while your logic is sound in certain areas it lacks logic in general.

First off, you are correct that the stability in our dollar and the international holdings of our dollar have kept the U.S. from bankruptcy. But since the 70's our country has run off a balance, a net deficit that is. It will continue because other countries pour their exports into our homes enticing foolish credit expanders into purchasing said exports. These export countries give Americans credit to purchase these items so their own growth continues to expand. Soon credit gets contracted and our balance gets so high the exports stop flowing...hurting the world. We are essentially the worlds unpaid festering credit card with only export countries to blame for the allowable credit. As soon as export countries learn to stop using the "bloated credit car" (A.K.A: America) for their capital dumping needs the world will balance out until another credit card is found and others dump on them - most likely Brazil or China next.

Second, Europe has severe problems America does not fortunately share - that is very unstable countries like Bulgaria and Greece sharing the currency. These countries have unstable governments that have a risk model included into the EUR currency value, which has to incorporate their possible default. EUR also has a legislative and economic challenge; working together efficiently. EUR has yet to do so and many countries have major disagreements to the direction of EUR, thereby making the EUR more volatile.

Third, Europeans tend to be snide, snobby, stinky, foolish humans. They think they are removed from abject moves of imperialism yet the world lay in utter shit due to their visions of grandeur. They preach nonviolence as they lay under the bicep of Russia's natural gas exports and middle east oil. U.S. takes a different stance - we tend to believe that beating the crap out of the weakest kid in the room will send chills to bullies of equal value to us like china. Also, as a Limey you should be more concerned with the absolute collapse of the pound and your total infrastructure failure. UK is a smoldering heap of burning "rubbish". While here in California we tend to have credit expanding idiots, we will become more humble over the matters and will learn to cease complaining like EUR continues to do...





On Feb 03 01:46 PM OldLimey wrote:

> Of course the Anglo-American media blitz against the EUR will continue.
> After all, any threat to the USD's primacy as the world's reserve
> currency - no matter how distant that threat - has to be addressed
> because that primacy is pretty much all that separates the US from
> outright default on its foreign debt. But could somebody, after they've
> hit the thumb's down of course, explain this to me: why does the
> potential default of Ireland or Greece pose a threat to the viability
> of the EUR when the obvious bankruptcy of California (one of the
> world's top ten economies) is immaterial to the upward march of the
> USD?

Feb 03 04:38 PM

[Subhankar:]

That's a pretty broad brush to stroke Europeans with. Snide, snobby, stinky, foolish people are present all over the world - quite a few of them in California.

The fact is that the current global crisis was initiated by the excessive greed of American financial institutions. Castigating Europeans won't alter that fact.

Feb 04 10:46 AM