Global Stock Markets Plunge

From the October 2007 Trumpet Print Edition

The end of July and beginning of August saw huge drops in financial markets worldwide, with the United States leading the fall.

In New York, the last full week of July was the worst week in nearly five years. The s&p 500 Index plummeted almost 5 percent. The Dow Jones Industrial Average plunged more than 440 points in one day, close to its biggest drop since 9/11.

The same week, in London, the ftse 100 Index suffered through its worst week since 2003, finishing down 5.6 percent. The July 26 trading session registered as the most volatile in UK history.

Heavy losses also occurred in Asia; markets in Europe were lower as well.

In Israel, Tel Aviv stocks (TA 25 Index) dropped 7 percent over two days of trading at the end of July.

Then on August 1, Australia’s stock market suffered its largest one-day fall since September 2001—shedding more than 3 percent of its value in a matter of hours.

This plunge sent shock waves throughout Asia. Hong Kong lost 3.15 percent, South Korea tumbled 3.97 percent, Tokyo fell 2.19 percent, and Singapore lost 3.27 percent.

“The stock market correction is turning out to be more serious than expected. We may take longer to recover from this … blow,” said Phillip Securities managing director Loh Hoon Sun (Straits Times, August 2).

The bottom line: Major markets are moving in unison more than ever before.

The recent cascade in stock markets is the result of new worries concerning a looming global credit crunch, according to bbc News. “In past years, financial markets, companies and consumers have all benefited from low interest rates and easy access to money, helping fuel a boom in spending, house price inflation and corporate takeovers” (July 27).

Trouble may continue as many central banks raise interest rates to alleviate inflation worries. Higher rates mean the cost of borrowing also rises, affecting access to credit as well as prices investors are willing to pay for assets.

However, a bigger threat to credit markets, especially in the U.S. and Britain, is the housing bubble. In America especially, huge investor losses in the subprime mortgage market have caused a re-pricing of risk across the industry. Investors are now less keen to buy any kind of risky loan from banks, and banks are stuck holding the loans on their books—reducing the amount of money available to lend.

With tightening credit markets, the worry is that the takeover boom may be ending, since there will be less fuel for investors and corporations to continue to drive up share prices through corporate mergers and acquisitions.

“We’ve had this massive change in investor expectations in terms of new deal flow,” Fred Dickson of D.A. Davidson & Co. said. “The lifeguards have shouted, and investors are now starting to heed their warnings and head back to shore” (ibid.).

Does recent stock market action foreshadow a coming global crash? As worldwide stock index figures show, investor confidence in the global economy as a whole is falling.

Signs of a global economic crisis continue to appear on the horizon. A stock market crash is ahead, and global economic leadership is about to pass from the U.S. to Europe. To see how this is already happening in terms of global confidence and reserve currency status, read “New Global Trend: Dump a Dollar, Buy a Euro” in our March issue.