Black Monday, all eyes on Western markets
Posted on 09 June 2008 with no comments from readers
Asian stocks fell sharply on Monday but all eyes are on the Western markets, particularly Wall Street for a potential Black Monday sell-off for equities, bonds and possibly commodities.
Some have interpreted remarks by the European Central Bank chief Jean Paul Trichet last week about raising interest rates as similar to comments from the Bundesbank which triggered the 1987 dollar and equity crash. Last Friday’s oil price surge has echoes of the 1970s and stock market crashes then.
It is true that markets are in fragile shape after the battering of the sub-prime crisis and not likely to shrug off oil or currency shocks. There are also plenty of rumors about further shoes to drop in the financial sector with more write downs as house prices continue to plummet and firms need to raise additional capital to shore up their balance sheets.
A further collapse in share prices would undermine the rights issues and sovereign wealth fund bailouts now in progress. It would ensure that the problems of the financial sector are translated to the real economy more rapidly in the shape of higher unemployment and tighter credit.
What will be the policy response of the Fed and Washington to this crisis? That is another problem. With the stimulus package done and interest rates cut to two per cent it may be time to stand back and allow markets to find a new bottom based on a revised view of fundamentals.
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As the FT’s Lex comments today:
Merrill Lynch estimates the combination of tighter credit, food and energy inflation and fewer jobs could take out $775bn of household cash flow – seven times the fiscal stimulus. Throw in the presidential election and it is hard to envisage aggressive rate increases prior to December. In that scenario, core inflation might remain relatively benign, as consumers weaken, while energy inflation remains strong. The big loser would be profit margins, as companies struggle to pass on rising costs. Odd, then, that US equities seem to have taken Mr Bernanke’s comments in their stride.
Telegraph today, but remember where you read it first!!
The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.
“A very nasty period is soon to be upon us – be prepared,” said Bob Janjuah, the bank’s credit strategist.