Weekly global market review: 8 - 12 September 2008

17th September 2008, Comments 0 comments

Global equities were dominated by uncertainty last week, and events have since been overshadowed by news on Sunday that US investment bank Lehman Brothers was filing for bankruptcy protection and that Bank of America has bid to take over Merrill Lynch.

8 - 12 September

Global equities were dominated by uncertainty last week, and events have since been overshadowed by news on Sunday that US investment bank Lehman Brothers was filing for bankruptcy protection and that Bank of America has bid to take over Merrill Lynch.

It seems the full implications of these developments will take time to unfold, however the immediate response has seen significant falls in equity prices, particularly financials. A flight to quality has boosted bond prices., however the US dollar is down sharply, having lost most of last weeks gains. Oil and agriculture prices have fallen, while gold has risen, albeit less significantly, given the uncertainty in financial markets.

For the time being, markets are likely to be dominated by the unwinding effects related to the overnight news rather than fundamental trends. It is certainly worth noting that in such volatile markets, investors who drip-feed money into the markets on a regular basis could benefit over the long haul.

Markets rebounded following the US Treasury’s unprecedented bail-out of government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac. Volatility returned however, leaving the broader equity picture more mixed over the period. Against this backdrop, the S&P 500 closed up 0.8 percent and the tech-heavy NASDAQ rose 0.2 percent.

US led themes spilled over into Japan, as uncertainty about the underlying health of the global economy sapped investor appetite. Economic data released at the end of the week showed Japan’s annualised GDP figure down 3 percent for the second quarter. Subsequently, the Nikkei 225 Average ended flat, while the Topix Index gained 0.5 percent.

Europe remained a mere sideshow this week, as the market’s attention centred on the GSEs and worries over the immediate health of Lehman Brothers. Europe provided further negative news as German industrial production fell 1.8 percent in July, more than expected, while core and headline inflation remained sticky. Nevertheless, the German DAX finished up 1.8 percent, while France’s CAC 40 climbed 3.2 percent.

The UK played host to further negative news surrounding economic growth and employment prospects, however sentiment appears to be improving towards the potential for interest rate cuts. On the back of this, the FTSE All-Share bounced back, recording a gain of 2.8 percent.

Asia & Developing Markets
Outside Japan, other Asian equity markets were hit hard by the increased volatility. The Hong Kong China Enterprises index of Chinese stocks, listed in Hong Kong, fell 6.7 percent, while Hong Kong’s Hang Seng index declined 2.9 percent.

The heightened sense of investor risk aversion was sharply illustrated by steep falls for emerging market assets. The MSCI EM equity index hit its lowest level since 2006, as the Russian RTS index fell 8.7 percent. Latin American indices were more mixed, with Brazil’s Bovespa rising 0.9 percent and Mexico’s Bolsa falling 1.2 percent.

Government bonds had an uneven week, as the stock market rally following the GSEs bailout drove US Treasury yields higher. However, the negative news surrounding Lehman Brothers sparked further uncertainty amongst investors, allowing bond prices to rebound. Meanwhile credit had a muted reaction to the GSE takeover as the iTraxx Crossover index, a closely watched barometer of broad credit quality, tightened 5bps to 550bps.

In currency markets, the US dollar continued to appreciate versus all the major currencies. Risk aversion was evident elsewhere as the Japanese yen reached a two-year high against the euro. At one point the euro sank below 1.40 to its lowest level against the US dollar for 12 months, while sterling hit a two and a half-year low.

Commodity markets sank as an uncertain outlook for global growth triggered a wave of risk aversion. A turbulent week in commodity markets saw the oil (Brent Crude) price drop below USD 100 even after OPEC declared plans to cut output. Gold tumbled below USD 750 an ounce to touch an 11-month low, before recovering that level at the end of the week, closing the period down 6.9 percent.

Commodity stocks suffered across the board, with the Reuters Jeffries CRB index, the benchmark indicator for the measure of global commodity markets, falling to its lowest level since early February. Oil (Brent Crude) dropped 9.7 percent and copper declined 4.8 percent to mark its lowest level since January.

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 BlackRock, one of the world’s leading investment management groups.

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