Before highlighting some memorable quotes from market commentators during the past week, let’s briefly review the week’s ups and downs on the basis of a few bar charts.
Worries of the recent credit market turmoil receded during the week as weak economic news got interpreted as ammunition for further interest rate reductions. Emerging markets as a group surged by 4.3% with a number of individual emerging markets advancing to new all-time highs, but mature markets also did not disappoint investors.
The past week brought to an end a turbulent and nerve-wrecking third quarter, the end result of which surprised many pundits. Contrary to expectations of just a few weeks ago, the Dow Jones Industrial Index (+3.6%), the Nasdaq Composite Index (+3.8%) and the S&P 500 Index (+1.5%), by means of example, all tallied useful gains.
GLOBAL STOCK MARKETS
Source: StockCharts.com
Global bond yields were lower on the week as investors focused on slower economic growth rather than on the inflationary implications of easy monetary policy. The rate of the US 3-month Treasury Bill, however, edged higher in the aftermath of the Fed’s rate cut.
On the currency front the US dollar remained under intense pressure in anticipation of a slowing economy and further interest rate cuts, and recorded an all-time low against a basket of currencies (using the US Dollar Index as a measure). The US dollar plunged to a 30-year low against the Canadian dollar, or so-called loonie or Canuck (not shown on the graph), and an all-time low against the euro.
FIXED-INTEREST AND CURRENCY MARKETS
Source: StockCharts.com
The declining US dollar encouraged further strong gains in gold (hitting a 28-year high), silver and platinum (not shown as a result of a data error). Crude oil recovered from a mid-week low to close almost unchanged, but in the light of storm concerns, persistent geo-political problems and the dollar’s weakness, a breach of the $100 level is no longer regarded as a far-fetched prospect.
Solid demand from China and other developing countries, as well as weather-related issues, boosted the prices of agricultural commodities to another strong weekly increase. Wheat soared to an all-time high, having more than doubled over the past year.
COMMODITIES
Source: StockCharts.com
Now for some words from the investment wise to navigate through the markets’ crosscurrents:
Economy.com: Survey of business confidence for world
“Global business confidence sagged again last week, despite the Federal Reserve’s aggressive cut in interest rates. Sentiment fell to a new record low in the US where it is now consistent with a contracting economy. Sales notably weakened last week and assessments of present conditions and expectations regarding the six-month outlook are very negative.”
Source: Moody’s Economy.com, September 24, 2007.
Richard Russell: “Inflate or die” – poison for US dollar
“The consumer is slowing down, and business is cutting back on its spending … it now falls on our government to keep up the spending. I’ve been warning about this all along. Richard Koo in his book, ‘The Balance Sheet Recession’, warned about this. With the massive amount of debt in this country hanging over us, with the monster current account deficits being run up every year, these are forces for deflation. To keep the US economy moving, there has to be BIG spending – and an expanding Gross Domestic Product. If the consumer isn’t going to do the spending, if business isn’t going to do the spending, then the government will have to do the spending. Yes, it’s ironic, but the US must now run bigger deficits than ever! It’s now truly a case of ‘inflate or die’.
“Unfortunately, this will play hell with the already weak dollar. Huge deficits, lower interest rates, a weakish economy, they’re all poison for any currency, and the dollar will be no exception. Who will benefit? The answer is that gold will benefit. When the dollar declines in value, it takes more dollars to buy an ounce of gold. In fact, it will take more dollars to buy diamonds, Picassos, top-grade collectibles, rare coins, objects of art, and so on. It will cost more dollars to buy anything of lasting tangible value.”
Source: Richard Russell, Dow Theory Letters, 28 September 2007.
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