G20 summit: what has it brought us?

World Markets

Steadily falling oil prices, gloomy macroeconomic and corporate news, the G20 financial summit in Washington, statements made by world’s authorities are not a complete list of the events which became the focus of financial markets’ attention last week. For the most part, news releases were negative, which brought about a decline of the major stock indices worldwide. Thus, the American indexes Dow Jones, Nasdaq and SnP 500 fell by 4.4%, 7.9% and 6.2% respectively. Germany’s DAX 30, Austria’s ATX PRIME and Belgium’s BEL 20 were down 5.4%, 14.5% and 5.2% respectively. On London's stock exchange the benchmark FTSE 100 index shed 3.5% WoW, and NIKKEI 225, a stock market index for the Tokyo Stock Exchange, edged down by 1.4%. The RTS index at Moscow stock exchange, one of the top decliners of the week, plunged by as much as 15.3%, following oil prices.

Let us start with economic statistics, which were generally rather downbeat. In Europe, the only rift of light in the dark clouds was the unexpected 0.1% growth of France’s GDP in the third quarter, which enabled the country to avoid sliding into “technical recession” (two consecutive quarters of falling GDP). On the other hand, the economies of Spain, Italy and Germany contributed to the 0.2% contraction of GDP growth in the eurozone. In France, the unemployment rate grew in the third quarter and industrial production fell by 0.7%. The situation is similar in Italy. As a result, production in the 15-country area using the euro was down 0.9% in the third quarter compared to a 0.6% decline in 2008Q2. As expected, the UK’s trade deficit reduced in September as the weaker pound gave some boost to the exports sector. UK producer prices fell by 1% in October from September mainly due to the downturn in oil prices. According to the latest Retail Sales Monitor from the British Retail Consortium and KPMG, UK retail sales declined in October as compared with the same month last year. Employment continues sinking, and the UK’s jobless rate has already reached a 16-year high. Economists say the number of people in work will continue falling for at least 1.5 years. The Bank of England’s inflation report turned out to be extremely pessimistic and leaves no doubt that a series of interest rate cuts lies ahead, even though UK interest rates are already at the record low level.

The US trade deficit also narrowed in September for the same reasons as elsewhere, i.e. due to the slump of oil prices. In addition, the budget gap was expected to widen quickly in October. The reality, however, appeared even worse than the most pessimistic forecasts as a record deficit of $237.2 billion is over four times larger than the October 2007 deficit. Retail sales fell for the fourth consecutive month in October, plunging 2.8% compared with September. October represented the weakest month for US car purchases on a per capita basis since the end of the Second World War. Sales of furniture, electronics, home appliances and foods, clothing and sporting goods also fell, while sales at bars and restaurants, as well as at health and personal care stores, rose. On the whole, nominal retail sales are down 4.1% in the past year from the previous year and about 10% if one factors in inflation. The number of newly laid-off people seeking unemployment benefits jumped to a seven-year high last week, rising to 516,000.

The news that Deutsche Post’s express delivery unit DHL had decided to curtail US operations stood out from the rest of corporate developments. DHL is reported to be planning to eliminate all its ground delivery operations and stop offering air service between US cities. The company is therefore going to cut 9,500 jobs within the country. The fact that the merger between American banks HBOS and Lloyds TSB failed to materialize was a grief to the public. The long-suffering insurer AIG reported its third quarter 2008 results, revealing a loss of $24.5 billion, which is more than four times worse than expected by the market. This result was “outstripped’ by Freddie Mac, whose loss was about $25.3 billion. Still, the Federal Housing Finance Agency has already coaxed the US Treasury to inject $13.8 billion in government aid into Freddie to bolster the mortgage giant. However, as it turned out later, that was only the beginning. Another mortgage agency, Fannie Mae, posted a loss of about $29.0 billion, filling markets with horror. Wal-Mart Stores, the world's largest retail network, pleased markets with the current results, but said its performance would become worse in the near future. Intel trimmed its sales forecast by $1 billion, Morgan Stanley intends to cut 10% of staff in its key business, and Microsoft close to a deal with Verizon Wireless that will make Microsoft the default search provider for Verizon cell phones, edging out Microsoft's arch-enemy Google.

The government’s actions were also much talked about in financial circles. The main news was an unexpected announcement of Treasury Secretary Henry Paulson in which he officially abandoned the original key strategy behind the rescue of the world’s financial system, i.e. the idea to buy bad assets from banks. He said that the administration had decided to shift the bailout focus from the financial to the household sector and now, most likely, the bulk of the saved money will be used to calm down the mortgage market and the consumer lending segment. In Europe, the gloomy interviews of European Central Bank President Jean-Claude Trichet and Eurogroup chairman Jean-Claude Juncker gave a clear signal that there will be another 0.5% rate cut in December and that is, possibly, not the end of monetary mitigation process.

Lastly, we would like to mention the most important but, probably, the most useless event of the week. G20 leaders met in Washington to discuss global financial problems. After the G20 financial summit, world leaders made a joint closing statement and announced an action plan aimed at tackling the current economic crisis and preventing a new one. According to world leaders at the summit, the cause of the crisis was the fact that investors did not realize well enough how risky their actions were, but the joint statement does not mention directly the boom of sub-prime mortgages in the USA considered by many to be the epicenter of the crisis. In the statement global leaders promised they would continue injecting funds from central banks into commercial banks as may be necessary to restore normal lending and boost consumer demand. Besides, G20 leaders agreed to create (by 31 March 2009) “supervisory boards” which will include all large regulators of the financial system from all over the world. The boards will meet on a regular basis to discuss the state of the largest banks operating in several countries. G20 leaders also undertook to improve derivatives regulation, although they did not clarify how they would do it. World leaders said that international financial institutions such as the World Bank and the International Monetary Fund had to undergo a fundamental reform so that emerging economies can have a wider influence on their decisions and that the IMF should get broader powers to monitor the economic policies of states. G20 countries will not raise new trade barriers over the next 12 months. Apart from this, it was also agreed to stiffen the requirements as to adequacy of banks’ capitals, risk management in financial institutions and companies’ rating standards.

Yet, experts admit that, except for the showy unanimity of developed and emerging economies, neither reforms nor innovations in the financial architecture were proposed and no specific decisions capable of effectively stimulating the economies were approved. Meanwhile, it was reported on Monday that Japan’s economy has entered a technical recession with its GDP marking the second consecutive quarter of decline.

Ukrainian Market

The Ukrainian stock market was sinking for most of the week but made a small rebound on Friday. This cushioned the fall of the PFTS index, which was down 4.3% according to the week's results. Second tier stocks even managed to edge up in price by 3.3%. Sectors behaved in different ways, with energy (-6.4%) and metals (-3.1%) being particularly hard hit, while engineering felt a bit better (-0.8%).

Worsening of macroeconomic performance, dismissal of Verkhovna Rada Speaker, and a series of corporate news were the main events of the week.

The Statistics Committee published rather gloomy data on industrial production in October revealing that its volume plummeted by 19.8% from October 2007 and by 7.6% compared with September this year. Among positive news we would like to mention, was a statement made by IMB Group (Cyprus) that it intends to invest $100 million in acquiring Ukrainian banks. Besides, the World Bank is speeding up preparation of the loan aimed at propping up the development policy of Ukraine and designed to provide the state budget with the necessary financing to support structural reforms, which will help mitigate the effects of the world crisis and lay a foundation for quick recovery of economic growth.

However, the most intriguing event in the market was a deal closed on the PFTS selling a ten-percent share stake in Khartsyzsky Pipe Plant for about $100 million, a record sum for the domestic stock exchange. The price of the company’s share skyrocketed 84.4%. We have information that the deal is purely technical, i.e. the sale took place inside the holding, within the framework of its reorganization plan. So, Metinvest (R. Akhmetov) still remains the owner of the stake.