Weekly global market review: 20 – 27 October 2008

20 -27 October 2008

A sharp sell-off in global equities on Friday capped a week in which investor confidence steadily deteriorated. Growing fears of recession overshadowed improved conditions in the money markets as major stock markets slipped to multi-year lows.

Commodity prices fell and credit spreads rose as nervous investors rushed for the perceived safety of the dollar, the yen, and Western government bonds. Heightened concerns about emerging markets, weak economic data from developed economies and a series of worrying corporate outlooks all contributed to the deterioration in investor sentiment.

Europe
European shares fell sharply on Friday in light of official data, which indicated a likely recession in the region, while weak earnings intensified investor fears. Shares in airlines, car manufacturers and technology firms reflected concerns about a severe
contraction in consumer spending.

US
US stocks also dropped with investors moving out of equities as signs mounted that the global
economic slowdown could be deeper than feared.

Asia
Asian indices fell on Monday, with banking stocks particularly hard hit, amid lingering worries that more measures would be required this week to help fend off a global recession. South Korea cut its interest rates and pledged more spending and tax cuts next year to boost economic growth, already at a four-year low.

Bonds
European government bonds rose amid a sharp fall in equities and an industry survey showed that the region’s manufacturing and service industries shrank for a fifth month in October as the economy slides toward a recession.

US Treasuries also gained with investors moving out of emerging-market assets to seek safe havens. The yield on the 30-year government Treasury dropped 13 basis points to 3.93 percent, the lowest since regular issuance of the security began in 1977.

Japan’s 20-year bonds fell for the first time in four days in early trading on Monday due to speculation that investors sold debt to cover losses on stocks. Meanwhile, Finance Minister Shoichi Nakagawa said that Japan is ready to take action on currencies if needed, following comments by the Group of Seven industrialised nations that it is concerned about the recent excessive movements of the yen.

Looking Ahead: This Week
For most central banks the emphasis is on lowering borrowing costs to cushion the economic slowdown.

Following interest-rate cuts in Sweden, New Zealand and South Korea, speculation has increased that further reductions would be forthcoming in the US, eurozone and the UK. The US Federal Reserve (Fed) is expected to reduce lending rates at a two-day policy meeting starting on Tuesday in response to unprecedented turmoil in financial markets and the threat of a global recession.

The consensus is for a half-point cut in overnight rates to 1 percent, which would be the lowest level since June 2004. The central bank is also expected to signal a willingness to lower borrowing costs again if needed – especially with inflation pressures fading fast. The US Commerce Department will release its first snapshot of third-quarter GDP on Thursday, the day after the Fed announces its decision.

Several other economic reports are also scheduled to be released this week. UK data on September new home sales will be out today, while on Tuesday, investors will focus on the S&P/Case-Shiller Home Price Index for August and October’s consumer confidence. Data on durable goods for September is due on Wednesday, while weekly jobless claims will accompany the GDP figures the following day. The report on September personal income and spending, which includes an inflation gauge, is due on Friday, along with the October reading of the Chicago PMI, a measure of manufacturing activity in the US Midwest.

On the earnings front, investors will focus on energy heavyweights Exxon Mobil and Chevron, due to post third-quarter results this week. Phone company Verizon, consumer products giant Procter & Gamble and insurer MetLife are among the other leading names set to report earnings.

Longer Term Outlook
Understandably, investors have become more concerned about risk due to the heightened volatility in share prices. However, history and more recent experience show that investors tempted to sell their investments to avoid further market falls risk missing out on significant market rises. As we have seen, the greatest rises in the stock market often come hard on the heels of the greatest falls.

Markets historically fall from time to time in the course of their longer-term upward progress. Investors who are willing to accept periods of market volatility and stay invested for the long term are often well positioned to grow their wealth as markets subsequently recover.

It is also worth bearing in mind that stock markets typically recover before economies do, since investors look ahead to the next phase of economic and stock market growth.

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.