Dollars flow like water

World Markets

For the world stock markets, the last week in October brought a sigh of relief for investors. Stock indices grew worldwide, which pleased the world’s financial community. Thus, American Dow Jones, Nasdaq and SnP 500 rose 10%, 10.9% and 10.5% respectively. Germany’s DAX 30 surged 15.6%, Austria’s ATX PRIME gained 5.5%, Belgium’s BEL 20 increased 9.0%, and Finland’s HEX GENERAL climbed 5.5%. Asian stock markets also made solid gains, particularly, Japan’s NIKKEI-225 posted a week-over-week rise by 12.1%, Korea’s MSCI KOREA skyrocketed 33.2%, and Australia’s ASX ALL ORDINARIES was up 11.5%.

There were plenty of reasons for optimism. The authorities went on systematically injecting dollars into the financial system – by the middle of the week the U.S. Federal Reserve established currency swap with Central Bank of New Zealand (USD 15bn), and also with the Banco Central do Brasil, the Banco de Mexico, the Bank of Korea, and the Monetary Authority of Singapore (providing USD 30bn each). This resulted in the massive cuts of basic interest rates. China's central bank cut benchmark rate for one-year loans and deposits by 27 b.p., and the Hong Kong central bank reduced its prime lending rate by 0.5 percentage point. The Taiwan regulator reduced refinancing rate on ten-day loans to banks by 0.25%. The Bank of Korea cut interest rate by 0.75%. The U.S. Federal Reserve slashed its key lending rate a half point to 1 percent, which had initially been expected by the market participants. At the same time, the cover memorandum was pessimistic enough with the economic situation in the U.S. described as bad with negative outlook heading towards recession. The Bank of Japan joined a global wave of interest rate cuts to fight the world's worst financial crisis and cut its benchmark interest rate to 0.3% on Friday. Even Norway was enforced to lower the interest rate by 0.5% the second time in the last several weeks, albeit it hadn't been inclined to come down to any rate cuts before. Instead, Denmark raised its interest rates. The central bank of Iceland surprised the markets having raised its interest rates by a huge six percentage points, to 18%. In all appearances, the European Central Bank is about to lower its benchmark interest rate, respectively, on Thursday by 0.5%.

Meanwhile, the Paulson’s rescue plan is deploying in the US. The buyout of ‘bad assets’ from banks will start shortly. The Treasury and Federal Deposit Insurance Corporation have an intention to spend USD 500bn to underwrite ‘bad’ mortgage loans. The administration is also examining a range of options for providing emergency financial help to General Motors, provided that the amount of aid needed doesn’t exceed USD 10bn. The Government’s bailout program has already started covering the new issues of commercial paper. Last week, the Fed and the market participants bought USD 67bn of debt, which is 10 times more than the previous week, when the Government was out of process.

The third-quarter GDP report was also in the spotlight last week. However, it was taken by the market rather positively, as it came in higher than market expectations. According to official data, the U.S. gross domestic product (GDP) contracted 0.08% compared to a quarter earlier or dropped 0.33% y-o-y. But good things come in small packages. San Francisco Federal Reserve Bank President Janet Yellen called the economy's recent performance ‘deeply worrisome’, and said the downturn was set to worsen considering the demand shrink.

The September statistics on durable goods orders showed the second successive monthly decrease, moreover, orders fell even in contrast to the last-year results. The new houses sales volume in September has grown against August, however, basically because the indicator of the end of summer was reconsidered downwards. The Standard & Poor’s/Case-Shiller 20-city housing index dropped a record 16.6% in August from a year earlier and the 10-city index plunged 17.7% showing that rumors about a stop in price reduction had been strongly exaggerated. Prices in the 20-city index have plummeted more than 20% and the 10-city index has fallen nearly 22% since peaking in July 2006. The September private expenditure report of the Bureau of Economic Analysis appeared to be quite gloomy, as, regardless of inflation, household expenditure fell by 0.3%, and the saving rate grew 1.3%, in other words, it looks like the U.S. economy is already caught in downward spiral. 

According to Conference Board, consumers' mood suffered a record drop in the last 41 years. The Reuters/University of Michigan Surveys of Consumers said its index of confidence in the U.S. plummeted to 57.6 in October 2008, and it came out below economists' expectations for a reading of 57.5. The Institute for Supply Management-Chicago said its index of Midwest business activity fell in October, 2008 to 37.8 from 56.7 in September, 2008, though economists had forecast the index at 48.0 for the reporting period.

The general mood decidedly became even more pessimistic when the American Express said it would cut 7,000 jobs, which was on top of other recent layoffs of thousands of workers by Whirlpool (5000 workers) and also Xerox, Merck & Co. Inc., financial services firm National City Corp. and other major companies. As to corporate news, General Electric warned about the possible reduction of its profit estimate in connection with the current crisis.

In the world economy things go gray. In Japan, despite the unemployment rate reduction from 4.2% to 4.0% and industrial production increase by 1.2% m-o-m in September 2008, retail sales showed the first decline y-o-y in 14 months.  On corporate fronts, Honda Motors warned of lower-than-expected annual profits as a deepening financial crisis has hammered demand for cars and sent the yen soaring. The Government has taken several steps to stir up domestic demand by approving a USD 50 billion stimulus plan that alerted the currency market participants in view of the latest currency fluctuations. In Europe the situation remained unchanged. In France the unemployment rate went on growing in September, though less if compared to the previous month, the customers’ mood, however, hit its lowest level on record in October. The Munich-based IFO institute said the Business Climate Index declined sharply in October, continuing its downward development. It fell to the lowest level in more than five years as the deepening financial crisis dimmed the outlook for economic growth. German retail sales dropped 2.3% from August to September, although the rate in the end of summer was good and the sales fall in Q3 made 0.1% only.  On the other hand, the pace of inflation is gradually slowing down – in Euro zone M3 money supply is slowing further, and consumer prices in October added 3.2% against 3.6% in August and 3.8% in July. The unemployment rate remained stable at 7.5% in the euro area. The panic in financial markets precipitated an immediate downturn in the real economy, and this resulted in somber economic moods and business climate collapse in the EU in October.

Ukrainian Market

Optimism inflows from the world trade desks brought the PFTS Index up 9.3% in the last week. 40 most liquid stocks gained at least 6.3%, first tier stocks added 8.4% and second tier stocks only grew by 0.6%. Energy stocks were tops in turnover – Zakhidenergo (+12.6%), Centrenergo (+20.5%) and Dniproenergo (-46.1%). Investors were also buying stocks of Alchevsk Iron and Steel (+27.7), Motor Sich (+11.4%), Ukrnafta (+34.8%), Mine Krasnoarmeyskaya (+29.0%) and Azovstal (+37.0%).

A political component in the market-moving news content is now important for the Ukrainian stock markt as never before. The fact that Verkhovna Rada passed the package of antirecessionary measures implies we are likely to get the prompt loan from the IMF. The loan, in its turn, will provide a serious support to the Ukrainian economy and national currency, and quite probably, will become a strong prerequisite for the stock market to continue its growth next week.