The World is on the Eve of the Next Financial Crisis

Sep 23 • Between the lines • 2015 Views • Comments Off on The World is on the Eve of the Next Financial Crisis

U.S. stocks have slumped dramatically, the Dow Jones Industrial Average has suffered its biggest two day decline since November 2008 to finish the trading day 3.51% down. The investors’ concerns, that policy makers are running out of tools to avoid another global economic recession, will not disappear.

All ten industries represented in the Standard & Poor’s 500 Index retreated at least 2.2 percent. The S&P 500 closed down 3.19% dropping circa 7.5 percent in four days. The MSCI All-Country World Index slid 4.9%, extending a drop from its May 2nd high in excess of twenty percent. The S&P 500 has fallen 18 percent from the three-year high reached on April 29.

The world is on the eve of the next financial crisis, with sovereign debt its epicentre according to Mohamed El-Erian, the chief executive officer of Pacific Investment Management Co., which runs the globe’s biggest bond fund. The European Central Bank failed to put in place a “circuit breaker” in order to contain the region’s debt crisis, El-Erian said at an event in Washington today.

At the same event world leaders and major finance chiefs demanded that Europe acts decisively to arrest its debt crisis, whilst emerging economies said they’d consider providing more backing to help prevent the chaos from spreading. As finance ministers and central bankers gathered for talks in Washington (against the backdrop of plunging stock markets) the leaders of; Australia, Canada, Indonesia, Britain, Mexico, South Africa and South Korea stressed the risk of the Eurozone debt crisis becoming contagious. Officials from the BRICS countries, including China, Brazil and India announced they’d consider giving more funds to the International Monetary Fund in order to boost global stability and liquidity.

The leaders wrote an open letter to France who are currently chair of the Group of 20 leading economies;

Euro zone governments and institutions must act swiftly to resolve the euro crisis and all European economies must confront the debt overhang to prevent contagion to the wider global economy.

Emerging-market stocks also tumbled, sending the benchmark index to the biggest drop in three years. Commodity producers led the retreat. The MSCI Emerging Markets Index fell up to 6.2 percent at one point in the session to 881.52 at 11:52 a.m. in New York, the steepest decline since November 2008. Indonesia’s Jakarta Composite Index slumped 8.9 percent, the most among world bourses and its largest slide since October 2008. Russia’s Micex index sank 7.8 percent, benchmark indexes fell more than 4 percent in India, Hungary and Poland. The Shanghai Composite Index and Brazil’s Bovespa lost more than 2.7 percent.

 

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Americans filed fewer new claims for jobless benefits last week, however, the decline was too small to dispel the macro worries that the economy is dangerously close to falling into a new recession. Applications for unemployment benefits dropped 9,000 to 423,000 in the week ended September17, the Labor Department said on Thursday. This was roughly in line with the expectations gathered by Bloomberg.

Moody’s Investors Service lowered debt ratings for Bank of America Corp, Citigroup Inc and Wells Fargo & Co on Wednesday, saying the U.S. government is getting less comfortable with bailing out large troubled lenders. The government is “more likely now than during the financial crisis to allow a large bank to fail should it become financially troubled,” said the rating agency, a unit of Moody’s Corp.

Moody’s decision hit Bank of America’s value hard, it downgraded both the long and short-term debt of the holding company and long-term deposits at its main banking unit. The ratings agency downgraded short-term debt at Citigroup and limited the Wells’ cut to its senior debt and to deposits at its lead bank. Bank of America is still struggling with billions of dollars of mortgage losses, litigation and stresses from the need to raise capital to meet new regulatory obligations. Bank of America Corp. is among a group of lenders that could face a wave of fresh lawsuits claiming the system they’ve used for more than a decade to register mortgages cheated cash-strapped counties out of millions of dollars. After Moody’s downgrade, the cost to insure $10 million of Bank of America’s debt for 5 years in the credit default swap market rose 48 basis points to $378,000 per year.

The Euro has lost ground versus the dollar and yen, but gained versus sterling. Sterling has continued it’s recent mini collapse versus the dollar, the Swissy and yen. The Aussie dollar has fallen versus the USA dollar, the dollar has faded versus yen and remained quite flat versus the Swissy. The equity index futures for the ftse and the USA are marginally positive.

 

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