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Market conditions return to extreme volatility

Posted by Adrian on June 12, 2008

The credit crisis, or ‘crunch’ that occurred at it’s peak, during the early part of 2008 has returned. Lehman Brothers and the whole of the Wall Street investment bank sector will be under strain again, as the decaying secularization market starts to erode profits. On top of this, of course there is inflation and the high oil price. As pointed out in World crisis scenarios for the 21st century – Peak Oil (update 12), the higher oil price most definitely will effect the global transport, courier services such as UPS and Fed Ex (UPS losing close to 3 percent on their share price, and Fed Ex losing 4 percent on their closing price 10 June 2008). The point being is, transport and global courier service stocks are going to get a hammering from the high oil price. So without concentrating too much on the banking sector, that in most countries has collapsed (stocks) and lost a lot of value. The one to watch is the mining and emerging economies markets, too see what will happen with share prices in the light of liquidity tightening and the high oil price.

Below is a graph of the Brazilian ^BSVP index, the Argentinian ^MERV index and the Dow and the S&P 500; the commodity or mining countries such as Brazil and Argentina have both been effected by not only extreme inflation problems but also a declining stock market. This could be indicative of the weight of the Merval and Bovespa index’s that are commodity orientated. In could be said, with a global slowdown commodity ‘boom’ economies such as South America and Australia are facing a huge correction in their mining sectors. The worry would be the profit erosion of mining stocks from the high oil price and china slowing down more dramatically than perceived.

(please note the 3mth graph above is running real time daily statistics)

Emerging economies particularly are vulnerable to energy concerns, China will continue to horde and stockpile oil putting a strain on global output and demand. The low US dollar and it’s effect on global commodity markets created a situation where the central banks (Europe, Asia and a lesser degree the US) may begin to tightened or hold rates; it would be curious to see how the central banks will handle the situation of global inflation and the effects it will have on the commodity/foreign exchange markets. Will the USD be de-pegged from other currencies? If Europe raises rates, which they might do; this will send the USD lower putting further pressure on the USD as base currency.

Could Ben Bernanke continue to cut rates? A real possibility, with commodity markets in the last week falling from historic highs on the premise that The Fed may have stopped their rate cutting policy to strengthen the the dollar. But there are ambiguous signals from the Fed and inflation, that do not tell us anything solid that they are actually concerned about inflation and a low USD.

So the slight bull run that markets have had is over. Generally most overvalued stock markets may be faced with a massive correction in the next month or so, especially the US market.

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One Response to “Market conditions return to extreme volatility”

  1. Grouchy said

    So this post is a day or so old and now we have the latest inflation and consumer confidence figures, which don’t seem to have surprised anyone.But the market went up?

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