Markets slump

25 April 2008

Having enjoyed a promising rally over the last six months or so, the US stock market slumped sharply in mid-May. The week 20 drop-off was triggered by higher than expected inflation figures, which in turn increased the likelihood that interest rates would have to go up. All this when investors were just getting used to the idea that the Fed would allow the cost of borrowing to flatten off this summer.

Although the Dow's drop of 2.16% between weeks 16 and 20 was not too damaging, other markets around the world reacted rather violently to the news. In the UK the FTSE 100 was down some 7.35%, retreating back well below the 6000-point mark, and other European bourses saw similar losses. Steeper still was the decline of the Japanese stock market, with the Topix 500 losing 9.45% of its value in the same four-week period.

It is a curious phenomenon that overseas stock markets always seem to react worse to bad economic news from the US than North American investors do, and it is one that is difficult to explain.

Crane shares

Unsurprisingly, crane manufacturers were also hit by the market slump, with IC 's Share Index dropping 5.26% in the four weeks from mid-April to mid-May. The Japanese manufacturers saw the steepest falls but, curiously, the Europeans seemed unaffected. KCI Konecranes lost only 1.41%, while Palfinger's stock was up 6.93%.

In the US Terex dropped a marginal 1.43% in the week 16 - 20 period, while Manitowoc was down a sharper 8.13%. Having said this, Manitowoc remains the long-term pick of the sector, with its stock up more than 125% on a rolling 12-month basis.

Currencies

May's stock market slump triggered a fresh dive fro the Dollar, which lost 5.36% against the Pound, 5.23% against the Yen and 4.03% against the Euro in four weeks. This took it to its weakest since late 2004 and the slump contributed to the downbeat sentiment on non-US stock markets.

While a low Dollar is good news for export-orientated American companies, it is a hindrance to foreigners trying to sell their products in the US. The drop in the Dollar means goods and services from outside the US have to become either more expensive or less profitable for the producer.

There are wider ramifications to this, because of the large number of countries around the world that link their currencies to the value of the Dollar in one way or another. The sharp slump in the Dollar, therefore, has the potential to be disruptive and damaging to world trade, particularly if it continues to fall.

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