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Brief explanation on current market volatility

Posted by Adrian on June 16, 2008

You don’t have to overly analyze the global stock market indexes too see volatility with it’s sharp rises and sharp drops. The US stock market index, particularly the Dow has weathered quite well against other markets on the premise of Federal Reserve rhetoric and recession denial.

In the chart below is the Dow, UK FTSE and the German DAX; the German economy has all but been a powerhouse within the declining (general) European markets. But like the US and UK, Germany has suffered huge bank writedowns and loss of profit in the banking sector (dragging the index down) – from Jan 2nd 2008 at the start of the credit crunch, the DAX fell from a high of 7,949.11 to 6,182.30 (March 2 2008).

(please note the 6mth graph above is running real time daily statistics)

The FTSE is not much different it trails in a similar patten to the Dow (even though the UK economy is in worst shape than the German economy); the UK has a major worry with an ailing banking sector that has been propped up by the Bank of England, not to forget the UK mortgage market is close to collapse.

Could it be that the UK markets rely intensely on US confidence in the markets? Hence the similar patten of the FTSE and the Dow?

The Dow , DAX and the FTSE that represent some of the biggest capitalized companies in the world; and all indexes have declined over a six month period. The US market, in my opinion, is the most vulnerable for a bigger decline or market crash. This would also put the UK stock market at a major risk too.

The daily rallies and sporadic sell offs are a good indicator of volatility, recent inflation figures are most likey being ‘fudged’ with oil and food taken out of the equation mixed with a slowing economy (cutting back on consumer consumption on retail). But contradiction is abound especially when Treasury secretary Paulson joined Europe finance minsters recently (G8 ) and confirmed that ‘stagflation’ is a major concern for the world and world markets

The question needs to asked at what point will the Federal Reserve increase interest rates? If ever?

Has the US underplayed inflation?

How deep will the US recession be?

The falling market since the onset of the credit crisis has been the loss of confidence and collapse of banking stocks. I suspect this will only get worst and drag index’s lower in the next months.

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