Weekly global market review: 3 – 10 November 2008

12th November 2008, Comments 0 comments

Asia’s strong recovery on Monday failed to translate into an equally enthusiastic rally in Europe and the US.

3 – 10 November 2008

Asia’s strong recovery on Tuesday failed to translate into an equally enthusiastic rally in Europe and the US, as investors reassessed the potential impact of the measures proposed by China to resuscitate its economy.

Although indices in Europe rose, led by commodity and engineering firms, US markets closed lower. In the former, banks and food retailers lagged and in the latter increasing worries about the future of some big names overshadowed initial optimism about China’s economic stimulus plans. A positive start for US stocks Monday faded into a slight decline by end of day.

Confidence was undermined by negative news, including a bankruptcy filing by Circuit City, a major US electronics retailer. Financials saw the steepest declines after analysts at Barclays Capital said that they expected Goldman Sachs to post a quarterly loss for the first time in its history on account of substantial equity market declines.

Moreover, the US government revised up its rescue plans for American International Group (AIG) after a smaller bailout was unable to stabilise the ailing insurance giant.

Automobile firms, such as General Motors and Ford, retreated due to persistent concerns about their future in light of a series of analyst downgrades.

Taking a cue from the more cautious moves on Wall Street and in Europe, Asian bourses were trading lower this morning. Investors took profits after yesterday’s robust gains and fears about global growth resurfaced.

European government bonds fell, as the Chinese stimulus package boosted stocks, thus curbing demand for the safety of fixed income assets.

US Treasuries gained after the government's first sale of three-year notes in 18 months attracted stronger-than-forecast demand. The US revived the three-year note to help pay for the Treasury's USD 700 billion bank rescue plan and fund a budget deficit projected to widen from last fiscal year's USD 455 billion as the economy shrinks and tax receipts slow.

Furthermore, the Fed and the Treasury enhanced the rescue package for AIG to USD 150 billion, almost doubling the initial bailout in September, to help ease the impact of four straight quarterly deficits, including a USD 24.5 billion third-quarter loss.

Elsewhere, American Express won the Fed’s approval to convert into a commercial bank, gaining access to funds as credit losses build and sales of asset-backed bonds decrease.

Japanese government bonds advanced this morning. A deteriorating outlook for corporate earnings hurt stocks and bolstered demand for debt.

Looking Ahead
History suggests that US stock markets respond better to a White House controlled by Democrats.

During presidential elections since 1948, the six periods where there was a Democrat in the White House coincided with stronger stock returns in the first year of the presidency (an average of 16 percent). The returns moderated to 8 percent on average in the second year, but rose again in the third to 25 percent. There are many other factors that drive stock returns such as the business cycle, but one of the main priorities of the Obama administration will be to demonstrate that it can provide the right environment for economic growth.

One of the key events will be the selection of a new Treasury secretary under President-elect Obama. The post will be a critical Cabinet position in the new administration as financial markets remain under stress.

According to a Blue Chip Economic Indicators monthly survey of economists, US GDP will fall by 2.8 percent in the final three months of 2008 and by 1.5 percent in the first quarter of 2009. In the second quarter next year, growth is expected to be 0.2 percent. The economists also expect a contraction in Japan, the UK and the eurozone in 2009.

This week's data releases include a US government report on retail sales and weekly data on how many Americans are filing for jobless benefits. A trade-balance report on Thursday will provide incremental evidence of how the export sector has held up with the dollar's recovery and widespread economic declines across the globe.

Investors will be taking some of their cues from the earnings outlooks of big-name retailers Wal-Mart, JC Penney and Kohl's. Meanwhile, talk of a new world financial order, global stabilisation and a 21st century Bretton Woods will continue to dominate the early part of the week as G20 finance chiefs gather in Brazil to prepare for the 15 November summit in Washington.

For further information, or to discuss how current global economic conditions are affecting your investments, please feel free to contact Craig Welsh at Spectrum IFA Group or visit www.expatfinance.nl.

This commentary was compiled with the assistance of Fidelity International one of the world’s leading investment management groups.

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