At the best of times, investors are jittery beasts and markets turn on a dime. These days, with so much bad news coming from all over, it no wonder many are selling off and heading for the hills. What’s caused this crisis?
Spending cuts in U.S.
U.S. politicians — Tea Party activists come on down — are learning the hard way what actually happens when Washington cuts spending, as they demanded. The cuts contained in the debt deal passed this week will shrink the size of the government all right, but they will also mean less money is being pumped into the already fragile economy. And that could be enough to tip the country into recession. Surprise!
What the latest figures say
U.S. weekly claims for unemployment insurance remained at a high 400,000 last week, the Labor Department said Thursday, as business and government layoffs persisted while job creation remained weak. The figures, for the week to July 30, stoked fresh concern on the eve of publication of the all-important U.S. non-farm payrolls report. Unemployment is expected to stay above 9% and the already struggling economy will weaken further in the third quarter.
Chaos in the eurozone
To the well-known basket cases — Greece, Ireland and Portugal — you can now add Spain and Italy. Investors had been primed to expect intervention by the European Central Bank in sovereign bond markets, and that indeed is what Jean-Claude Trichet, the ECB president, appeared to sanction at his monthly press conference Thursday. In the event, any intervention was confined to bonds of Ireland and Portugal — which are considered beyond help. Mr. Trichet refused to say anything about supporting Italy or Spain.
Commodities selloff
With the realization the global economy may be faltering comes the realization that commodities are not the safest investments. Gas prices fell to a five-month low Thursday — which may be good news for drivers — while investors stampeded out of commodities and stocks into safer havens. The U.S. dollar, bonds and cash under the mattress were seemingly good bets. “People are saying: Let’s get out and we’ll keep our money, and buy again down the road when things look even worse and everything is cheaper,” said Fred Ketchen, director of equity trading at ScotiaMcLeod.
Effective devaluation
Countries with strong currencies like Switzerland and Japan are trying to counteract the ruinous effect this is having on their industries. Switzerland cut interest rates to weaken the Swiss franc, the value of which has spiked in recent days. Tokyo spent an estimated one trillion yen ($13 billion) to stem the strength of its currency. In Turkey, the central bank cut interest rates to an all-time low to protect its currency, the lira, which has been buffeted by the travails of the euro.
What’s ahead
In a gloomy commentary in The Daily Telegraph, Jeremy Warner writes: “We appear to be in the early stages of a classic race to the bottom of competitive devaluation. The way things are going, protectionism won’t be far behind. The fiscal canon is exhausted and policymakers are struggling to find alternatives. Not since the deepest days of the banking crisis, when we were looking into the abyss of a second Great Depression, have things looked so scary. Policy seems impotent before the storm.”
National Post, with files from news services
Source: National Post
No comments:
Post a Comment