World Markets Take A Pounding – The Beginning Of The Correction?

| January 21, 2008

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While the US took MLK day off in the markets, the other parts of the world traded into uncertainty and doubt. As a result all world indexes ended sharply lower:

				% Today	 % YTD
	FTSE 100 (UK)		-5.48%	-13.61%
	DAX (Germany)		-6.83%	-15.49%
	Nikkei (Japan)		-5.49%	-14.36%
	HANG SENG (China) 	-7.41%	-13.22%

Why is this happening? Firstly the financial stress that we have been documenting here for over a year is continuing to break the surface. Most of the economic break-downs in my life have been driven from the bottom, where the consumers get crushed first, which triggers business to slow down and everyone suffers, with possibly the exception of the very rich.

This time around the biggest, richest firms are being flayed before our very eyes. This what is driving the market lower at the moment, fear and worry that the structural problems with the biggest US financial institutions are not contained within the borders of the US.

What do I mean? (after the jump)

Japanese yen surges as equities tumble – As described earlier, the Yen carry trade (borrowing cheap Yen in bulk to finance deals) has been one of the enablers of the financial nonsense for the last several years. As the Yen climbs, these big money companies are getting squeezed hard, forcing them to liquidate assets (as in sell stocks) which fuels the downturn. Watch for the Yen to continue to climb for a while until money comes pouring back into the US as everyone realizes that the rest of the world is going to dive along with the US.

Stocks in Europe crushed on financial-sector worries – European banks are under fire because they also dabbled in the funny bond derivative schemes that are plaguing US banks.

Outrunning the avalanche: Credit crisis looms large over annual Davos summit

Participants are also certain to dissect the “decoupling” scenario, which holds that strong growth by emerging economies will help insulate the rest of the world economy from a U.S. slowdown.

Economic indicators are signaling slowing growth in Europe. And while emerging economies appear largely unscathed so far by the fallout, worries about the U.S. picture have put pressure on some benchmark stock indexes in Asia and Latin America since the beginning of the year.

Sorry to report to the egg-heads in Davos, things are far more inter-linked than ever before, you can no more distance your self from the fire burning through the world economy than you can send your liver out for re-work while you continue to drink.

Shipping index’s plunge raises growth concerns: Falling global demand for bulk commodities could indicate a global cooling

The Baltic Dry Index fell to a reading of 6,462 Friday, down nearly 30% since the start of the year and 42% from an all-time high reached Nov. 13, according to the Baltic Exchange in London.

The gauge, which tracks freight rates on the mammoth vessels that carry tons of soybeans, corn, coal and metals across the globe, is used by economists to get an early read on global trade and growth trends. When demand for those basic materials shrinks, freight rates drop and the index tumbles. The trend provides an early snapshot of trade volumes before governments compute reports.

“It’s fallen quite significantly,” said Bernard Baumohl, managing director at The Economic Outlook Group in Princeton, N.J. “It points to a slowing in the global economy.”

The story is not quite accurate, the index is down quite a bit, but the chart in the story only shows the most recent time scale, and a longer view shows the cyclical nature of dry goods shipping. We are in a low spot lower than the seasonal variation should be.

So, what does this all mean? For starters the world markets are running without Uncle Sam on the job right now. The US has an interesting advantage of being the last major market in the world’s trading day. As a result the whole world can go insane and turn hugely negative on hype and rumor. Many times the US starts out lower reflecting the trend, and then the bargain hunters move in and start buying the over-sold positions.

When we sit out a Monday, like we did today, that calming effect is missing. As a result the frothy world / emerging markets, which had a longer run up un-supported by fundamentals than the US, are free to dive fast and hard.

Word is that the futures for tomorrow are off more than 4%. Should we open that much lower tomorrow morning, lots of players will be buying up stocks that are suddenly cheap. I am 100% out of stocks right now, but I might be tempted to buy some tomorrow should this come to pass.

We are entering a long period of correction, but I think and feel this is an anomaly that will be 80% corrected by the end of the week. It is, however, part of a longer term trend lower that is likely to last several years.

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Category: Economics, Main, Recession Watch

About the Author ()

Bruce Henderson is a former Marine who focuses custom data mining and visualization technologies on the economy and other disasters.

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