Turmoil continues

18 March 2008

The woes at the sub-prime end of the US cred it market continued to wreak havoc with the world's stock markets throughout August. However, the extreme volatility has seen some daily rises as sharp and steep as the daily losses – rather than a ‘bull'or ‘bear'market, the best description at the moment is a ‘bungee'market.

Having said that, the net effect has been for the markets to fall. The Dow was down 1.76% at the end of week 34 compared to the position four weeks previously. The Nikkei 225 was much worse affected with a 5.99% drop, while the FTSE 100 more or less held its own with a marginal 0.07% rise. Certainly none of these could be described as a particularly good result but, at the same time, things could have been a lot worse.

The same could be said for IC's share index, with its 6.38% fall to 623.06 points. Having fallen as low as 565 points during the recent upheavals, the rebound back into the 600s clawed back some useful ground for the index.

Crane shares

As one would expect, there were some heavy losses for some of the companies that make up the IC Share Index. It is interesting to note, however, that while the world's stock market woes stem from a problem in the US, it is the Japanese manufacturers that have suffered the worst over the last four weeks.

There were particularly heavy losses for Tadano and Hitachi, while Kobe Steel performed ‘best'with a 9.01% drop. This reflects what happened to the broad Nikkei 225, which also reacted more violently than US indexes over the four week period.

One of the theories about this phenomenon – and it is a recurring pattern – is that markets outside the US react worse to bad news from America because the country is such a major net importer of goods. A total of US$ 2.2 trillion-worth of goods and services was imported into the US in 2006, giving the country a trade deficit of some US$ 760 billion. With America being such a massive market for the rest of the world, it is, perhaps, unsurprising that export-orientated countries such as Japan react so badly to bad news.

Currencies

The turbulence of the last few weeks has also had an impact on exchange rates. With the US economy slowing and activity peaking in Europe, the Yen has become a more attractive currency as growth in Japan is seen as improving over the next year or two.

As a result, the US Dollar dropped 2.8% against the yen between weeks 30 and 34. At the same time it bounced back against both the Euro and the Pound, although this was from some of the lowest levels ever seen.

Outlook

The markets look set to remain volatile for some time – at least until third quarter results can help quantify what is happening to US corporate profits. It is also important to keep the recent turmoil in the right perspective. All the major indicators are in positive ground compared to where they were a year ago. Indeed, the crane sector is 64.9% higher than it was last August.

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