Global overview: Wild ride for markets continues
By Dave Shellock
Copyright The Financial Times Limited 2007
Published: August 3 2007 17:53 | Last updated: August 3 2007 17:53
Financial markets went on another wild ride this week as investors remained unsettled by the fallout from the US subprime mortgage crisis and fears of a global “credit crunch”.
Adding to the mood of uncertainty was a spike in oil prices to a record high and the release of some disappointing US employment data yesterday.
Credit markets see-sawed as they responded to a steady stream of largely negative news, much of it concerned with the potential impact on private equity deals, one of the key pillars of recent support for stock markets.
Bernd Meyer, strategist at Deutsche Bank, estimated that the repricing of credit risks had halved the number of potential leveraged buyout candidates.
“While our credit strategists reckon that the repricing of credit risks might be largely behind us, at least in the short term, the de-leveraging of investors is far from being over,” Mr Meyer said.
The iTraxx Crossover index - a closely watched indicator of credit market sentiment - pushed above 500 basis points on Monday for the first time ever. However, by late yesterday the index was back below 400bp - roughly where it began the week.
Equity markets had an equally volatile time. By midday yesterday in New York, the Dow Jones Industrial Average was showing a gain over the week of 1.3 per cent, while the S&P 500 was 1.3 per cent.
In Europe, the FTSE Eurofirst 300 index suffered its worst one-day fall for more than year on Tuesday, but still finished the week with a loss of just 0.2 per cent.
It was a slightly grimmer picture in Asia, as the Nikkei 225 Average fell 1.8 per cent over the five-day period to end below the 17,000 mark. Most other markets in the region eased back, although Shanghai bucked the trend as it climbed to a record high.
Most analysts remained upbeat about the outlook for equities, suggesting that fundamentals remained intact.
“If anything, valuations have even improved by virtue of last week’s sell-off,” said Mike Lenhoff, chief strategist at Brewin Dolphin. “Earnings are still being upgraded, for this year and next, and there is still a lot of dividend growth.”
Mr Lenhoff conceded that private equity groups have been forced to rethink acquisitions in the publicly-quoted sector but added that public companies are continuing to buy back their shares.
“Does all that sound bearish or bullish? Our view is that all we’re seeing is another correction in a secular bull market.”
Despite the equity turmoil, there was relatively little evidence of safe-haven buying of US and European government bonds for much of the week.
However, prices rose sharply after yesterday’s soft US non-farm payrolls data.
The number of jobs created in the US last month rose by 92,000 in July, down from June’s less than the forecast gain of about 128,000, while the unemployment rate edged up from 4.5 per cent to 4.6 per cent.
Currency markets saw a tentative re-establishing of carry trades, where investors sell low-yielding currencies such as the yen to fund purchases of higher-yielding assets.
The Japanese currency had rallied strongly in the previous week as risk aversion was heightened by the turmoil in credit markets.
Sterling was little changed over the week after the Bank of England, as expected, left interest rates at its policy meeting this week. The European Central Bank also kept borrowing costs steady but dropped a strong hint that rates would rise next month - offering support to the euro.
Worries about emerging market currencies - previously relatively isolated from the turmoil elsewhere - began to emerge this week.
Analysts suggested that currencies of EM nations running large current account deficits, such as Iceland, South Africa and Turkey, could face problems.
Emerging market bonds also came under selling pressure, with the spread on JPMorgan’s EMBI+ index over US Treasuries briefly touching its highest level for over a year.
In commodities, US oil futures touched a record high in the wake of data showing a steep decline in US oil inventories. Prices subsequently eased back, leaving September West Texas Intermediate down more than 1 per cent over the week.