August 19, 2011
SCOREBOARD: Market terrors
Colin Cieszynski and Michael Hewson
It was another roller-coaster day for global markets. Equity and commodity markets steadily declined through most of the overnight session with concerns over the impact of a new financial tax combining with growing sovereign risk on the European banking sector, and soft jobless claims data (408,000 vs street 400,000) to drag down global economic expectations.
The higher than expected US consumer price inflation (3.6 per cent vs street 3.3 per cent) also impacted markets, suggesting that the Fed may have trouble bringing in QE3 any time soon, while Morgan Stanley's call that we "are dangerously close to recession" along with Deutsche Bank's downgrade to China growth also took its toll.
The mid-morning release of the Philadelphia Fed manufacturing index was truly shocking and the straw that broke the camel’s back, coming in well below expectations (-30 vs street +2) and sparking a major selloff through the late morning.
Disappointing US existing home sales (4.67 million vs street 4.90 million) didn’t help either. It appears that, still shell shocked from last week, traders were quick to pull the rip cord and get out of the market first then ask questions later. Given the recent volatility there may have been more stop loss orders than usual in the market that could have been hit, adding automatic selling to the pressure. Forced selling from margin calls was likely less of a factor though, since so many offside positions would have been cleaned out last week.
The Philadelphia Fed data, combined with other weak numbers in recent weeks, have people wondering if sometime over the last month, the gears of global commerce have ground to a halt? The Fed number combined with the Canadian Ivey PMI number of last week which fell to 46.8 (contraction territory) in July from a healthy 59.9 in June reminds me of a story I’ll never forget.
Back in 1990 when I was a student, I had a summer job working in the auto industry. For most of the summer we were busy and then one week orders just fell off a cliff and we were left standing with practically nothing to do. The dropoff at that time was due to political factors (Iraq invasion of Kuwait) but the moral of the story is that the tipping point from expansion to recession can happen very quickly and economic activity can collapse given the right circumstances.
This summer, it appears that the debt crises in the US and Europe along with the wild gyrations of equity and commodity markets have taken their toll on business confidence. It remains to be seen if this is a speed bump on the road to recovery or if the wheels have completely fallen off the economic bandwagon. During expansions, you can have the occasional slow quarter without falling back into recession but there remains a risk that debt-related uncertainty could continue for the next several months, with European leaders continuing to drag their feet and the possibility that US negotiations on deeper cuts and tax reform could turn nasty again.
The bigger problem going forward is that with governments so deep in debt already and with QE2 having failed to get the economy going, whether we have an outright recession or a stagflation environment (low economic activity and high inflation), governments and central banks may find themselves with very few stimulus options left. This means that the global economy could struggle for a long time, limiting upside and creating an environment that favours capitalising on shorter-term trading swings over long-term positioning.
read full article @ http://www.businessspectator.com.au/bs.nsf/Article/Wall-Street-markets-crisis-commodities-currencies--pd20110819-KUSNL?OpenDocument&src=sph
