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Last weeks global stock market falls seems like a distant memory and a much bigger sequel looks to be in the works in this week. The world has caught up to the US, and the domestic credit crisis has officially become a Global one. Who knew that struggling home owners in small town USA facing foreclosure due to dodgy mortgages could impact the financial well being of people living here in Australia, so heavily and so quickly. The doom and gloom news is pervasive in the media and here are some that have really got me worried:
Bailout Failure: U.S. stocks have tumbled as the world’s financial crisis didn’t appear to be repaired by the $700 billion rescue plan. Since the bailout plan was approved the Dow has dropped more than 12%! So if the bailout plan fails to stem the tide, what is plan B? Do we even have a plan B?
Dow Falls Below 10,000 on Credit Fears in Europe and Emerging Markets Drop Most in 20 Years. European and Asian stock markets have had 4% – 10% drops on top of the big drops last week. The MSCI World Index lost 6% overnight, it lowest level in 3 years. The credit crisis has even spread to the oil rich Middle East with Dubai, the Construction Mecca of the world, finding it hard to get funding for new projects. Some European governments have had to guarantee bank deposits to avoid a panic among consumers. The figurative run on the bank is a real possibility in a number of countries, perhaps even in Australia.
A vicious deflationary cycle is about to ensue: Banks worldwide, stung by $588 billion in write-downs related to toxic assets — especially mortgage-related securities — will further reduce the flow of credit, strangling growth. That will push house prices lower, forcing additional losses and making banks even more reluctant to lend. As the credit crisis worsens, businesses will find it almost impossible to raise prices. They will then be forced to close or start laying off employees, which will in turn reduce consumer demand and thus create a vicious downward economic spiral.
Full of doubts, consumers cut spending. This will be the final nail in the coffin of any economy. Consumers have already cut back spending, and further cutbacks coming into the holiday season (which account for more than 50% of retail sales) will mean big job losses and a deep recession in the new year.
Oil drops below US$90 a barrel for the first time since February, and Commodity Prices plunge the most in 50 years. Normally this would be good news and a time to cheer. Unfortunately this is just a confirmation that global demand is expected to slow and as a result the demand for oil and other commodities is expected to fall dramatically. Commodity rich countries like Canada, Australia and South Africa have seen much sharper falls in their markets and currencies than in the US. Gold spikes and $US1000 is back in range this week. Gold, which is traditionally viewed as an investor haven rather than an industrial resource, was a notable exception to the commodity sell-off.
The US dollar and Japanese Yen are rallying because of its perception as a safe-haven currencies. With predictions of a severe global recession in 2009, Investors and financial institutions across the world are reversing positions out of the euro and emerging market currencies that had been financed by shorting the U.S. dollar.
More to come…but the news is not good. A global recession is fast becoming a reality and there is little anyone can do to escape it. My bet is the US Federal reserve and other global banks (like Australia has already done) will soon announce big interest rate cuts to stem the credit crisis – but could be a little too late as looks like the financial crisis has become too big.
Sources: Marketwatch.com, WSJ.com, New York times (Picture), Bloomberg.com
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