Global Markets in Review: In the Clutches of Uncertainty

A perfect storm of a deepening global recession and banking woes last week battered equities and supported the safe havens of the U.S. dollar, government bonds and gold bullion.

A dismal corporate earnings outlook, fears about bank nationalizations, especially Bank of America (BAC) and Citigroup (C), and a warning by Moody’s Investors Service of possible downgrades of European banks exposed to the slumping economies of Central and Eastern Europe, stoked investors’ fears.

Few stock markets escaped the selling pressure as summarized by the week’s movements of the MSCI Global Index (-7.7%, YTD -16.0%) and the MSCI Emerging Markets Index (-9.3%, YTD -11.4%). Venezuela (+6.7%), Pakistan (+6.1%) and Morocco (+3.7%) were the top three performers, whereas potential debt defaulters - Russia (-17.1%), Ukraine (-12.5%) and Hungary (‑12.4%) - occupied the bottom end of the ranking (data courtesy of Emerginvest).

The major US indices suffered their worst weekly losses this year (to record six losing weeks out of seven): Dow Jones Industrial Index -6.2% (YTD ‑16.1%), S&P 500 Index -6.9% (YTD -14.7%), Nasdaq Composite Index ‑6.1% (YTD -8.6%) and Russell 2000 Index -8.3% (YTD -17.7%).

Negative sentiment dragged the S&P 500 to seven points below its October 2002 low, whereas the Dow stopped only 80 points short of this key level. It is noteworthy that it took five years for the latter to increase from 7,286 to 14,165, but only 16 months to wipe out the entire 2002-2007 advance.

click to enlarge

Source: StockCharts.com

With the bears prowling Wall Street, none of the main economic sectors registered positive returns on the week. Among exchange-traded funds (ETFs), the KBW Bank Index ETF (KBE) and the Financial Select Sector SPDR ETF (XLF) lost 16.6% and 15.9%, respectively. However, as highlighted by John Nyaradi (Wall Street Sector Selector), inverse exchange-traded funds (ETFs) such as ProShares Short S&P 500 (SH) (+6.8%), ProShares Short Dow30 (DOG) (+5.8%) and Short QQQ ProShares (PSQ) (+5.1%) gained handsomely.

As was the case the previous week with the announcement of Treasury Secretary Timothy Geithner’s financial stability plan, last week’s mortgage relief plan, designed to stem the foreclosure crisis, also made scant impression on the stock market. President Barack Obama earmarked $275 billion to help reduce mortgage payments for up to nine million struggling borrowers and enable Fannie Mae and Freddie Mac to keep mortgage rates down.

Jeff Randall (Telegraph) wrote:

… we are in denial about the causes of recession and therefore cannot face up to the action required to lift us out of it. As Niall Ferguson, professor of history at Harvard University, wrote: ‘The reality being repressed is that the Western world is suffering a crisis of indebtedness.’ In which case, pumping out yet more debt will not be the answer. It is simply a short-term fix that in the long run creates an even bigger disaster, like giving a shivering alcoholic a case of Special Brew.

(Also, read RGE Monitor’s recent guest post on the U.S’.s financing needs.)

Barry Ritholtz (The Big Picture) has an interesting post up that lists the names of those favoring and opposing nationalization of the bigger U.S. banks. Yes, I know it is a politically controversial issue, but rather get it over and done with than pussyfooting with “behind-the-curve” measures as being experimented with by the policymakers week after week. If nationalized banks are still alive once the toxic junk has been marked to market, they can start acting like banks and stake their claim to be privatized once again in the next economic upswing.

Notwithstanding supply concerns, government bond yields in the U.S., U.K. and Germany declined as investors continued their flight to safety. Yields of 10-year Treasuries, Bunds and Gilts were down by 14, 12 and 12 basis points respectively.

Increasing financial turbulence also resulted in the gold holdings of the world’s largest bullion-backed ETF jumping to a record level.

The Financial Times reported:

The SPDR Gold Trust (GLD) holdings have risen by 228.6 metric tons so far this year, to a record 1,008.8 metric tons late on Tuesday, absorbing in the first seven weeks of the year about 10% of the world’s annual mine gold output.

Gold bullion breached the $1,000 level on Friday and closed the week at $1,002 (+6.4%) - within striking distance of its record of $1,031 reached in March last year.

With the yellow metal behaving like “the last man standing,” David Fuller reminded us of the quote by the English poet Lord Byron:

O gold! I still prefer thee unto paper, which makes bank credit like a bark of vapour.

Besides precious metals shining brightly, the other commodities performed poorly, as shown in the graph below. The Reuters/Jeffries CRB Index recorded a six-and-a-half year low as global growth deteriorated.

Next, a tag cloud of my week’s reading. This is a way of visualizing word frequencies at a glance. Key words such as “banks,” “China,” "financial” and “gold” featured prominently.

Go to Page 2 - Global Markets in Review: Markets, Economy

Comments on this article>>

Comments

[prudentinve...:]

"As Niall Ferguson, professor of history at Harvard University, wrote: ‘The reality being repressed is that the Western world is suffering a crisis of indebtedness.’ In which case, pumping out yet more debt will not be the answer."

This obvious fact has been repeated, many thousands of times, both by recognized experts, and by vast numbers amongst the general public, in editorials, letters to newspapers, comments on the web, etc.

Although some mavericks in congress have made similar remarks, yet, amazingly, the authorities who actually make decisions have persistently refused to recognize such an "inconvenient truth".

Feb 22 08:11 AM

[Dave Wrixon:]

Totally baffled as to why anyone would regard the dollar as a safe haven!

Feb 22 09:42 AM

[Conan the B...:]

Dave: The US had Trillions of USD Debt already floating around the World prior to 2008. $4 Trillion between the Saudi and China alone. Do you actually think they would encourage a precipitous drop in the Value of their Holdings?

A Strong USD allows China to pay $20 Billion for this and that. It allows the Arabs to continue funding various projects from the Increased value of their holdings.

It is A Safe Haven relative to the Lack of fluid Safe currencies elsewhere. Fluid...every emerging market piled into USD reserves after the Asian currency crisis.

What Currency would you suggest to supplant the USD?

Gold is not an option.

Feb 22 10:14 AM

[ROLEXDAYTONA:]

When stock price is right, who cares about uncertainty, it's all priced in with reserve of overdose, news can get worse, stocks will get better.
The end of the world scenario is mostly debated in psychiatric facilities, not on the pits, for traders it is the world as usual with it's buying/selling opportunities.

Feb 22 10:50 AM

[Mad Hedge F...:]

GOLD! GOLD! GOLD! This is the cry being heard worldwide by investors in the Great Gold rush of 2009, looking for a generic “short America” trade. Where in the past gold seekers used sluices, shovels, and jackhammers to extract the glittery stuff in California’s Sierras, Alaska’s Klondike, and South Africa’s Rand, today the instrument of choice is the mouse. Online traders are unleashing clicks by the millions to buy ETF’s, American Eagles, mining shares, and futures contracts. With stock traders sitting on their haunches, wondering if the Dow will hold 7,000, this is the only thing that is working right now. Gold is no longer just catastrophe insurance. Traders are buying gold more for what it isn’t, than what it is. It isn’t made of paper, made in the US, or held in custody by Bernie Madoff or Stanford Financial. The yellow metal hit a new high for the year of $999 overnight, and the risk of a “melt up” is increasing. The Street Tracks Gold Trust ETF (GLD) is now the seventh largest holder of the barbaric relic in the world. For the newly aggressive, look at the DB Gold Double Long ETF (DGP), which gives you a 200% long exposure to gold, and is up 54% in a month. Who says there is nothing to buy out there?

Feb 22 11:09 AM

[Mad Hedge F...:]

Wells Fargo Bank (WFC) has been in a free fall for the last two weeks, as investors bail out of the stock in fear of nationalization, or an Alt-A loan loss driven bankruptcy. The stock has vaporized 47% in three weeks, down to a new 12 year low. Veloceraptor like hedge funds have been major short sellers of the stock because it is one of the last banks with any meat still on the bone. Demand for out of the money puts is soaring. The stock is being dragged down further by big selling of bank and financial ETF’s, like the Financial Select Sector SPDR (XLF), which has WFC as its second largest holding at 8.74%.

Feb 22 11:18 AM

[RICHARD (SA...:]

On Feb 22 10:14 AM paultaut wrote:

> Dave: The US had Trillions of USD Debt already floating around the
> World prior to 2008. $4 Trillion between the Saudi and China alone.
> Do you actually think they would encourage a precipitous drop in
> the Value of their Holdings?
>
> A Strong USD allows China to pay $20 Billion for this and that. It
> allows the Arabs to continue funding various projects from the Increased
> value of their holdings.
>
> It is A Safe Haven relative to the Lack of fluid Safe currencies
> elsewhere. Fluid...every emerging market piled into USD reserves
> after the Asian currency crisis.
>
> What Currency would you suggest to supplant the USD?
>
> Gold is not an option.

As long as the US of A has the "MIGHT" to blow its foes back to the stone age or even further, the greenback will continue to be the predominent currency of all markets of any size.
Once the US becomes 2nd in the power rage to totally destroy the planet, then the glorious dollar will fall to its real value given the US's underlying debt.
It would surely be replaced by something else, however by that time, our planet will certainly be on the decline if it exists at all
so, WHO WILL REALLY CARE!

Feb 22 03:17 PM

[iyamwutiam:]

The US will not blow a lot of countries into the stone age. Because it is akin to killing the goose that lays the golden egg. You can forget China (we need to keep those American factories in Taiwan/China/etc profitable so they can continue to exploit foreign labor and disenfranchise American labor -facilitating the concentration of wealth to the connected and incompetent.

There doesn't need to be an 'alpha' male of currencies. Simply put -there just needs to be a lack of interest in the illusion of hegemonic theory. In fact- there is a lot of movement underway to trade in regional currencies in South American and Asia. The only reason it isn't happening in the GCCs is because we are very careful to prop up dictatorships of nincompoops (usually hereditary-to ensure a more nincompooped line thank to in-breeding). At some point -these countries will have suppressed their populations a bit too much with their camel prod carrying police (think taser) and addiction to an entitlement lifestyle which necessarily forces one to be encumbered with wholesale hypocrisy. But at some point -sheer economic necessity and the fear of being overthrown will cause them (like Saddam) to be disloyal to their 'master'.

The writing is on the wall-as surely as it was for Britain. The Western era has ended in a brief 4-5 hundred year span. Perhaps it may be the Chinese in the interim- however- I think in the long run -the indigenous socialist movements of South America and the countries vast resource and relative under-population will be the start of the new era-starting around 2125- but the date for the beginning of the end is 2012-as was prophesied.

Feb 22 08:11 PM

[Mad Hedge F...:]

Gold continues to move from strength to strength, hitting a new high for the year of $1,007 today. In January, gold ETF’s bought a record 104 tonnes of the yellow metal. Last week alone, purchases soared to an astonishing 110 tonnes. There has also been huge buying of December, 2009 1,000 calls, suggesting that some players are hoping for a melt up if we break the old highs at $1,050. Looks like we have found our new bubble. Let the games begin! If you have been regularly reading my letter you should by now have sacks of gold American Eagles stacked up against the walls, your portfolio is brimming with gold mining stocks like Barrick (ABX), Freeport McMoran (FCX), and Rangold Resources (GOLD), and your safety deposit box is groaning from the weight of the gold bars it is holding. Gold has since become the trade of the first quarter, with the open interest on call options on the Street Tracks Gold Shares ETF (GLD) exploding from 445,000 to 1.1 million in just the past few weeks. Options implied volatilities are suggesting that gold could hit $1,115/ounce by June. Oops, you forgot to buy the yellow metal? Use $50 pullbacks to get long. Investors will continue to pour into the sector, since it is one of the few things the government can’t create more of with a printing press.

Feb 22 09:48 PM

[Moon Kil Woong:]

The US$ looks like a safe haven if you own any other currency. We just happen to be on the better end of the great dilutive fiat money slide. But slide inevitably we must.

Fortunately, production of goods and services/productivity has kept rising to offset a lot of the mass printing. But now that there is mass idling of resources one can not depend on increased production to offset the tidal wave of new cash being printed.

I know, right now excess cash production is going into bank vaults etc. and not being used. Eventually it will be. After all, that is what is was made for. Don't use it and you will inevitably be crushed by it's interest payment requirements and/or you'll get diluted by inflation or both.

Feb 22 10:16 PM