Heading down below the March 2009 stock market lows?

Posted on 03 October 2011 with 1 comment from readers

The first week of October looks like another disaster brewing for global financial markets. Hong Kong is off four per cent and falling fast with other Asian markets.

The never-before-wrong ECSI says a recession has started in the US, HSBC has Chinese orders showing the first signs of weakening and the eurozone crisis lurches to another crunch with Greece edging close to default.

However, the damage that has been done to global credit markets over the past few months is what makes the traditional October stock market crash unavoidable this year. Credit default swap insurance has surged to levels not seen since the financial crisis of 2008 that means credit is being switched off around the world.

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Trade and credit crunch

The impact on global trade is already there and will become quickly apparent. Third quarter financial results from US companies start this week and will have to include warnings about this global outlook. You cannot hide a recession under the carpet for very long.

It’s a truly global phenomenon with Bank of China bond CDS insurance doubling in the past two months. Even Australia is getting caught this time because its banks are heavily reliant on foreign borrowing to make up for a deficiency in domestic savings.

In short the world is facing a similar siezure in global credit and trade as we saw in late 2008 and early 2009, a crisis that took $16 trillion of Fed money to stop it turning into an economic depression. This time the Fed is low on funds and lacks political support, and from China to Europe the ability to support markets is less.

Financial markets have only really started to adjust to this new economic reality. They have moved away from expecting a sudden recovery back to previous growth levels to accepting a ‘new normal’ of low growth and higher inflation. But what we have coming does not look like that at all, and as markets digest this unpleasant diet they will fall.

Technical view

Thanks to www.stockmarket618.wordpress.com for the chart below flagging up the correction in global stock markets that clearly started over the summer:

The forecasters say: ‘The S&P500 monthly chart above shows a series of broadening patterns, aka megaphone wedges.  The recent megaphone has been modified but remains very bearish.  The three megaphone patterns reveal an unstable market where buyers and sellers battle for control.  Long candle wicks on September chart reveals substantial buying support which only slows the decline. The March 2009 lows will still be breached.’

We are not technical chartists but can only note that the economic fundamentals also support this conclusion.