Recession and not impending collapse now dominate the thinking in financial markets, especially among equities investors.
As we reported on Friday in the Weekly, the latest Merrill Lynch survey of big global investors has a high proportion believing in the idea of a global slowdown.
"The survey, completed as global equity markets fell in value by 18.7 percent, shows that almost seven out of 10 respondents (69 percent) believe that the global economy has entered recession, up sharply from 44 percent one month ago. The proportion of investors who believe that monetary policy is too restrictive has reached a net 59 percent, representing a new high for the survey.
"But low risk appetite and a belief that equities are undervalued could provide the foundations for a rally. Growing risk aversion has led to a record 49 percent of respondents who are overweight cash. The number of respondents who believe equities are undervalued has reached a 10-year high, at 43 percent."
In Australia cash is king for the battered investor.
The AMP’s head of economics and strategy, Dr Shane Oliver said in his weekly not on Friday:
"Shares remain very oversold and are due for a decent rally. But, given the severity of the global financial crisis and economic slump now underway it is impossible to be confident that shares have hit the bottom for the bear market.
"While banks have probably seen the worst, the gathering pace of the economic downturn will continue to weigh on the profit outlook generally and on economically sensitive sectors like resources and industrials in particular, he wrote.
"• However, while the near term outlook is very messy, with shares down 40% plus from last year’s highs they are excellent value from a longer term perspective particularly with governments doing everything they can to head off a further sharp deterioration in the economic outlook.
"• To gain confidence that the bear market in shares has come to an end we would look for the following: oil prices remaining down taking further pressure off inflation; further falls in bond yields; further declines in interest rates, particularly in Europe, Asia and Australia; a significant improvement in money and credit markets; and a stabilisation in the US housing market.
"At this stage credit markets still remain problematic and the US housing slump is still continuing."• The global economic downturn and the likelihood of falling inflation over the year ahead suggests that bond yields could fall substantially further from current levels.
"• Commodity prices, including oil, are likely to see further declines over the next six months as the global economic downturn continues.
"• With commodity prices likely to fall further and more interest rate cuts expected in Australia, the $A is likely to remain weak well into next year. In fact, a fall below $US0.60 cannot be ruled out." he concluded.
So with that in mind, our market will open around 20 point lower from what the futures were telling us Saturday morning after wall Street fell in late trading.
The Dow closed 127 points, or 1.4% lower after falling by 261 points in the morning and the bouncing up 301 points in the afternoon.
The Standard & Poor’s 500 index lost 0.6% and Nasdaq lost 0.4%.
The S&P 500 closed at 940.56 points; Nasdaq Composite Index at 1,711.29 points, and the Dow at 8,852.22 points.
Yet the S&P still finished the week up 4.6% – its biggest gain since the invasion of Iraq in March, 2003 – with Nasdaq up 3.7% and the Dow 4.7% higher. It was indeed an odd week’s trading, but a far better performance than the 18.7% plunge the week before and more around the world. Over the eight trading days to October 10 the US market shed 2400 points or 22% on the Dow.
Dealers said Friday’s lower close was again sparked by the overwhelming number of trades took place in the final few minutes of trading as fund redemptions hit for mutual and hedge funds seeking to raise cash to payout investors.
Markets were also impacted by the monthly options expiration, which can cause increased volatility in the underlying equities.
The week included the Dow’s biggest one-day point gain ever on Monday (936 points) and the second-biggest point loss ever on Wednesday (733 points).
But there were some solid factors hurting confidence: US housing starts fell to a 17-year low in September and building permits (a good way of assessing future starts) fell even more.
Both were worse than analysts had forecast, again confirming that many US economists and analysts still haven’t adjusted their thinking to the slumping economy. No wonder that Merrill Lynch survey showed such high levels of scepticism about third quarter earnings.
Starts fell to a seasonally adjusted 817,000 in the month from 872,000 the previous month, while building permits fell to a seasonally adjusted rate of 786,000 in September, down from a revised 857,000 in August.
And another report, the University of Michigan’s consumer sentiment index, fell to 57.5 in October from 70.3 at the end of September, the biggest month-over-month slide in the history of the report. Economists had forecast it to drop to 65, so they were not in touch with reality, or so it seems.
In Australia the market will be lower, but it will be looking for a bit more guidance from other factors after it fell Friday off the back of Wall Street’s rise on Thursday night.
Investors shrugged off gains on Wall Street to push the market down yesterday, led by heavy selling in the resources sector.
The ASX 200 fell 1% to 3970.8 points, dragged down by a slide in mining stocks and losses in the big banks.
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