Weekly global market review: 6 – 10 October 2008
A coordinated cut in interest rates by central banks around the world failed initially to lift the gloom hanging over financial markets on Wednesday; however on Thursday significant gains were posted in Europe and in Asia.6 - 10 October 2008
The US Federal Reserve (the Fed) led the round of rate cuts easing interest rates by half a percentage point to 1.5 percent as did the European Central Bank (ECB), the Bank of England (BoE) and the central banks of Canada, Switzerland, Sweden and United Arab Emirates. In addition, the UK government announced an injection of GBP 50 billion of taxpayers’ money into its banks in a massive bailout which is likely to involve the government acquiring preference shares and increasing the provision of liquidity.
Asian stocks gained Thursday morning after the region's central banks – Taiwan, Korea and Hong Kong – cut interest rates, joining a global effort to limit the economic impact of the financial crisis. Indonesian stocks are suspended from trading following Wednesday's 10 percent drop.
European equities declined sharply on Wednesday as credit market and economic growth worries persisted, despite rate cuts. In the UK, banks were preparing to boost their capital reserves after the government launched a dramatic rescue plan to restore confidence among financial institutions and avert a severe economic slowdown. Under the rescue plan, at least GBP 200 billion (EUR 248 billion) will be made available to UK banks under a special liquidity scheme and the banks will also increase their Tier 1 capital by GBP 25 billion. Citigroup upgraded the UK banking sector from “underweight” to “neutral”, citing the rescue package. But the failure to directly address the banking crisis in Europe left many of biggest institutions on the continent floundering. Franco-Belgian bank Dexia continued its slide despite a move by the French government to allow the state to take stakes in any bank running into difficulties, as the rating agency Standard & Poor’s lowered its rating on Dexia’s credit.
Elsewhere, commodity stocks weighed on the benchmark indices, tracking slides in crude and base metals with BHP Billiton, Rio Tinto and Antofagasta falling sharply.
Stocks rose in early trading on Wednesday after the world’s largest central banks cut borrowing costs in a coordinated effort, before resuming the slide to close the day lower. The S&P 500 Index ranged between a gain and a fall of 2.5 percent before ending 1.1 percent lower, the Dow Jones Industrial Average dropped 2 percent and the Nasdaq Composite Index fell by 0.8 percent. Aluminium major Alcoa declined 12 percent after reporting disappointing earnings. The financial sector remained volatile as Bank of America slumped after it sold shares at a discount to shore up capital.
Asian equities advanced, after a volatile start on Wednesday. Central banks in the region also cut interest rates on Thursday morning. In an extraordinary policy meeting, just two weeks after its last rate cut, which reversed course following a four-year rate raising cycle, Taiwan’s Central Bank of China lowered the benchmark discount rate to 3.25 percent from 3.5 percent. Bank of Korea cut its rate to 5 percent for the first time since 2004, while the Hong Kong Monetary Authourity followed the Fed, lowering its benchmark lending rate by half a percentage point to 2 percent in a bid to improve liquidity in the interbank market. It was the second rate cut in as many days, totalling 1.5 percent.
Earlier on Wednesday, China cut interest rates for the second time since September. Japanese equities rallied as investors took advantage of declines to buy shares trading at cheap valuations. Australian shares declined, with Commonwealth Bank falling after the company said it has raised AUD 2 billion (EUR 965 million) via a placement of new equity to institutional investors at a discount to the market price.
Ten-year government bonds in the UK, US and Europe ended lower after central banks of the US, the UK, Sweden, Switzerland, Canada and Europe lowered their interest rates by 0.50 percentage points.
Meanwhile, in the US, 10-year swap spreads (the premium charged to exchange floating for fixed-rate interest payments for a period of 10 years) declined notably following the interest rate cuts and the sale of USD 20 billion in 10-year notes through emergency auctions. In Japan, government bonds were trading lower in morning trades on speculation that the Bank of Japan will issue additional debt after the lower house approved a JPY 1.8 trillion (EUR 13 billion) supplementary budget to fund an economic stimulus plan.
Crude oil prices dropped on Wednesday to their lowest level since December, below USD 85 (EUR 62) a barrel. However, gold surged beyond USD 900 an ounce on safe haven buying.
Global market nervousness continues as analysts feel it is too early to judge the impact of the recent government policies, much of which is unprecedented. The coordinated rate cuts on Wednesday failed to improve investor sentiment, but the move does signal a period in which foreign authourities seem to be taking up more of the burden of combating the crisis from the US Fed and Treasury.
Understandably, in uncertain times like this, investors’ focus is on risk and it is not unusual to view that risk as increasing as share prices fluctuate in value. However, investors tempted to try to time their investments – maybe selling holdings to avoid further falls – may then risk missing out on market rises. History shows that those all-important “best” days often come straight after significant market falls. Those with a long-term time horizon are best advised to sit tight and ride it out.
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 (www.spectrum-ifa.com) or visit www.expatfinance.nl
This commentary was compiled with the assistance of Fidelity International, one of the world’s leading investment management groups.