Posted on 05/14/2006 6:28:31 PM PDT by blam
Markets braced for the worst
By Ambrose Evans-Pritchard (Filed: 15/05/2006)
Global markets are bracing for turmoil today after an ominous slide in the US dollar and a slump in equity and bond prices late last week sent tremors through the global financial system, evoking memories of the 1987 crash.
Emerging economies have led the sell-off as investors recoil from risky assets, pummelling stocks and bonds in Turkey, Hungary, Iceland and much of Latin America.
The currencies of Brazil, Mexico and South Africa all suffered their sharpest falls in two years as foreign funds rushed for the exits.
In New York, the Dow Jones industrial index fell 262 points over Thursday and Friday to 11381, setting off contagion in Japan and Europe. The FTSE 100 had its worst drop in three years on Friday, falling 129.9 points, or 2.2pc, to 5912.1.
Analysts said there were now clear signs that monetary tightening by the world's central banks was starting to crimp growth. Lombard Street Research warned the US was now heading into outright recession, with China also facing a hard landing.
"Stock markets in the middle of 2006 are confronting a tight Federal Reserve and European Central Bank, sharply higher bond yields, and a downswing in potential profits," it said.
It raised the risk of "an impending financial crisis" caused by excess credit and leverage across the global economy. The group advised investors to liquidate stocks and move into cash yen until the storm has blown over.
The dollar has slumped 6pc against the euro and 8pc against the yen this year as the markets anticipate an end to interest-rate rises by the US Federal Reserve, switching attention back to America's debt mountain and current account deficit of 7pc of GDP.
Volkmar Hable, chairman of Samarium Technology, said the world was now on the brink of a dollar crisis.
"The crash in the autumn of 1987 started with a massive dollar and bond decline in the spring. We are experiencing exactly the same now," he said.
Ominously, bonds are no longer viewed as a safe haven, a sign of fear that inflation is gaining a foothold in the major economies.
Interest rates on 10-year Treasury bonds have jumped from 4.36pc to 5.19pc since February, in part because Asian investors are demanding a higher premium for holding risky dollar investments. The 10-year bond is the benchmark for economic activity in the US, setting corporate borrowing rates and the cost of most mortgages.
The bond slide is exacting a toll on the US property market, where the price of new homes has fallen for five consecutive months. A half-year inventory of unsold houses now hangs over the market.
Goldman Sachs, however, is sticking to its optimistic forecast, banking on a seamless "hand-over" from a slowing US economy to a re-awakening Europe and Japan, while China will continue to be an engine of global growth. The IMF is also bullish, forecasting roaring growth of 4.9pc in 2006, one of the highest rates in half a century.
Sky is falling alert!!
We're doomed!
By Ambrose Evans-Pritchard
(Filed: 15/05/2006)
Financial markets are preparing for a turbulent week after a triple slide in global bonds, stocks and the US dollar sent jitters through the global system in recent days.
The FTSE-100 index was a major victim of fast-spreading concern, suffering its worst one-day drop in three years on Friday with a 129.9 points fall.
The downturn comes after a rush by Britain's small investors to join the equity boom, the time-honoured sign of a market reaching a peak.
Much of the money has gone into emerging markets, which suffered the brunt of the sell-off last week. Stocks and bonds fell sharply in Turkey, eastern Europe and most of Latin America.
Better informed, boardroom directors have been cashing in profits, selling £566 million of shares in the last three months, almost three times the amount of shares purchased.
Fears of a dollar crash have intensified after the US Federal Reserve signalled last week that it may have reached the end of monetary tightening after raising interest rates to five per cent.
Foreign flight from the US bond market has led to a sharp rise in bond yields, raising the cost of mortgages and corporate borrowing. Analysts have begun muttering about a US recession.
This coincides with a rise in oil prices.
Just about all the Central Bank people in the world consider these increases "inflationary". On the other hand, since these increases raise the cost of production for just about everything, they are more correctly identified as a cause of inflation.
This means that when the Central Banks respond, they do so by double-counting the inflationary pressures.
On the other hand, the Central Banks almost never respond to decreases in oil prices as quickly as they do increases.
Not being an economist I have no idea what all this means ~ of course, the economists don't either.
the dollar selloff of the past three weeks has been of concern.
Can you please explain this?
The 30 year bond is back and the yield continues to ride higher than 10 year bond. As long as you don't have an inverted yield curve with respect to the 30 year bond and stocks selling at ridiculous excess with regard to earnings, the bull market should continue.
The Nikkei is already down 260 points at market open. BUY SIRI ... Sirius if you want a big play.
Please don't use FR as your personal stock-tout forum. Thank you.
Everything you mentioned about the relieving of the inverted yield curve is true. Technicals do not point to a Bears running on the street, but why do I feel like I am walking on a cliff? I can't point to specifics, but something does not feel right with the data. Inflation is a concern, but the FEd raising rates may be a problem.
People start yanking their money out of the stock market at the slightest negative news.
Inflation is nominally defined as 'too much money chasing too few goods'.
Some inflation is easily identified, as with gas prices. The dotcom boom was an inflation, and some believe that its residual effects continue in inflated stock and housing markets.
All of this is of great concern to economists, who have predicted eleven of the last three recessions.
Parachute safely stored as I watch as a spectator. A significant pullback perhaps?
Yes sir master.
(This assumes, of course, that no one is able to take any action at all to reduce the cost of producing a widget so that the former price is maintained.)
One should logically wait for the price of a widget to rise before finding that there's been inflation.
Instead, the oil price increase is considered "inflationary", and then any consequental rise in the cost of a product brought about by that increase is also considered "inflationary". That it's the exact same inflationary agent at work in both cases is simply ignored for the purpose of increasing the discount rates.
These guys got us into some deep trouble back in the 1930s, and actually helped ruin the economies of the Western World. Some people are less charitable and accuse the Central Banks, particularly the Federal Reserve, of purposefully creating the Great Depression in order to improve P&L at certain member banks (where they had their own financial ties).
Yet others hate economists and would have them tracked down and murdered in their beds if they could.
I am not convinced they are entirely evil. Sometimes prices go up, and sometimes they go down, and sometimes trade is hindered for nebulous purposes.
I'm sure you know more about it.
George tried to destroy Korea, but even that far smaller economy survived his attack.
you've done it before, and it was obnoxious then. this really isn't the place for it.
misconceptions about inflation are a pet peeve with me, is all.
I'm not invested in the market, so let'er fall!
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