Intellectual Thoughts by Sanjay Panda: Stock market/Finance - Global Market turmoil

Stock market/Finance - Global Market turmoil

USA the world’s biggest and most liquid stockmarkets, and it has long been a cliché that when it sneezes the rest of the world catches a cold. But as other markets mature and capital moves more fluidly across the globe, the risk of infection spreading the other way grows.when shares dipped around the world after China’s stockmarket suffered its biggest drop in a decade (before rebounding somewhat on Wednesday). America saw its steepest points fall since the markets reopened after the terrorist attacks of September 11th 2001—and the end of its longest run without a 2% daily drop since the 1950s.
All eyes were on America on Wednesday. Shortly before the markets opened, the Bureau of Economic Analysis revised its estimates of fourth quarter GDP growth sharply downward, to 2.2% compared with a previous estimate of 3.5%. American traders shrugged off this bad news, however, and markets recovered slightly. By noon, the Dow Jones Industrial Average was up by over 50 points, while the NASDAQ and the S&P 500 had posted single-digit gains over the previous close. Shanghai also rebounded, but other markets in Asia were weak. European indices also lost ground, with the FTSE 100 giving up almost all the year’s gains by the end of day.
Tuesday's rout began when mainland China’s biggest market, in Shanghai, ended the day down almost 9%, as investors there became spooked that the authorities would clamp down on the irrational exuberance that has taken hold there in recent months. This triggered falls in Europe, where markets ended down by 2-3% (the FTSE Eurofirst 300 index fell by 2.86%). The Dow Jones Industrial Average dropped on its opening and continued to fall through the day, at one point plummeting more than 200 points in a couple of minutes.
There was much surprise that China could have had such an impact, despite its fast-growing influence on the world economy. In truth, it was merely one of several catalysts. Investors are becoming more worried about the state of America’s mortgage market—particularly “subprime” lending to less creditworthy borrowers—and the fast-proliferating derivatives linked to it; they were also unnerved by a warning from Alan Greenspan, former chairman of the Fed, that America could possibly be sliding towards recession; a fall in durable-goods orders added to broader economic concerns (though the latest consumer-confidence figures were good).
The resulting sell-off was nothing like the panic that gripped Wall Street on “Black Monday” in October 1987, when the Dow fell by 22.6% in one day. But it looked nasty compared with the long period of steadily rising share prices and low volatility that preceded it. Banks may be cutting their teams on the New York Stock Exchange’s trading floor, but activity was frenzied as volume soared to a record. The Dow ended the day down 416 points, or 3.3%, at 12,216.24. The Nasdaq Composite Index dropped 96.66, or 3.9%, to 2407.86, with 11 fallers for every gainer. It was its biggest percentage fall since December 2002. This sudden reassessment of risk sent investors flocking into ultra-safe Treasury bonds. The price of the benchmark shot up, pushing yields down to levels not seen since mid-December.
The worst point of the day was during a few mad minutes at around 3pm. The Dow, down by a little over 200 points at the time, suddenly plummeted by another couple of hundred points in less than a minute—a rate of decline that traders said was unprecedented. (It soon emerged that the suddenness of the fall was down to a delay in tabulating the index, itself caused by the massive volume of trading.) The Dow hit a low of 546 points below its starting point, before recovering somewhat.
The underlying fall may have been exacerbated by various factors. The NYSE runs a hybrid market: part “open outcry”, part electronic. There may have been a disconnect between the two bits, with traders on the floor reportedly struggling to keep up with computer orders. The popularity of exchange-traded funds—tradable baskets of stocks linked to an index—may also have played a part. Short-selling of these is thought to have added to the downward pressure during the day. Volatility, as measured by the VIX index, leapt by more than 60%, its biggest one-day rise since 1991.One concern is that the heavy wiring in the markets could not keep up with the rapid changes. Another is the rapid growth of derivatives. The problems in the subprime mortgage sector have focused attention on the slicing and dicing of risk using sophisticated instrument such as collateralised debt obligations and credit default swaps. Banks have used these to shed credit risk, but it is not clear where all that risk now lies. Financial shares were hit particularly hard on Tuesday, suggesting that nerves are starting to jangle over this uncertainty. Shares in Goldman Sachs, perhaps the smartest of the financial alchemists, ended down 6.6%. This was partly due to its Asian exposure (it owns a stake in a big Chinese bank).Now the bond market scam news just spreading & if the rumors are found to be true then no prize for guessing where the market is heading at least in the short term.

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