Soaring and Sinking

Posted November 07, 2008

The Dow Jones Industrial Average dropped an additional 450 points in response to bad US economic news. The Bank of England surprised everyone with a 1.5 percent interest rate reduction.

 

There are certain words that keep showing up in financial market news.  Two of the most common are “soaring” and “sinking”.  The words are exact opposites, but are indicative of the continued instability in the global financial markets. 

Yesterday, 6/November/2008, both words could be used to describe the financial activity.  The Dow Jones Industrial Average had that “sinking feeling” as it lost 443.48 points to finally close at 8,695.79.  This was the worst 2-day loss the market has experienced since 1987.  The loss represents investor responses to bad economic news that continues to flow like water from a tap.

The worst news in the US reported yesterday was that the number of jobless claims is expected to hit a new 5 year high.  The report comes out today with the actual numbers, but the expectation is the number might reach 200,000.  If it does, it means this will be the most jobs lost since 2003.  This news was coupled with the continuing news about the auto industry crisis.  The Ford auto company reported it lost $2.98 billion in the 3rd quarter of 2008.  The major auto makers are requesting $25 billion in Federal loans and want a piece of the $700 billion financial bailout pie.

In addition, retailers are making it clear there will be significantly lower earnings reported in 2009.  In fact, chain stores reported a decline of .9% in sales in October which was the first drop reported in 7 months.  Even the technology sector is reporting a decrease in orders.

The United Kingdom is not faring any better.  The International Monetary Fund has predicted there will be a 1.3% contraction in the economy which will be one of the steepest declines in world developed economies.  Retail sales have fallen for 7 consecutive months while the economy shrunk .5% for the 3rd quarter of 2008.   This contraction represents the worst decline since 1990.

The Bank of England surprised investors by cutting interest rates by 1.5%.  The UK interest rate now sits at 3% with the Bank of England promising more cuts by the end of the year if necessary.

Jobless rates are soaring while economies are sinking.  Financial markets soar one day and sink the next.  The worst news is that this is going to go on for a while with broad recognition there is a global recession in full swing now.

On the other hand, global emerging markets are stabilizing.  At least they are stabilizing compared to the threat of complete collapse just a month ago.  The International Monetary Fund has made it clear that continued input of foreign currencies into the emerging economies will stabilize the markets.  The IMF has also recommended that developed economies lower taxes and increase public spending in order to slow jobless rates and increase the flow of spending.

As the governments absorb the bad news, the currencies continue to fluctuate.  In US dollars, the dollar had strengthened against the euro ($1.2729), the Great Britain pound ($1.5741), the Swiss franc ($.8496), the Australian dollar ($.6699) and the Canadian dollar ($.8409) by the close of the US financial markets on 6/November/2008.  The dollar weakened against the Japanese yen ($.0102). 

US President-Elect Obama is not wasting any time announcing appointments, but he is not going to choose the new Treasury Secretary this week.  Investors are anxious for him to name the new position and then for him to also tell markets what his intentions are concerning the continued implementation of the bailout program.  How Obama handles the economic crisis is going to have an affect on the currency markets as investors seek investment protection.

So everyday you can expect to see the words “sinking and soaring” in the same news reports.  Unfortunately, right now neither word is used to report good news.

 

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