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Saturday 11 October 2008
The Week the Financial Crisis Became the Great Crash of 2008
Panic swept global markets this week, raising the spectre of an imminent economic collapse and unleashing a stock market crash that has only a handful of historical comparisons. PDF
The Week the Financial Crisis Became the Great Crash of 2008
Nick Westra, Sean Kennedy and Jonathan Yang 11 October 2008
Panic swept global markets this week, raising the spectre of an imminent economic collapse and unleashing a stock market crash that has only a handful of historical comparisons.
The Hang Seng Index plunged 16.32 per cent on the week and approached a three-year low, closing at 14,796.87. The local market lost HK$2 trillion in value.
US and European markets suffered similar losses. In four days, the Dow Jones Industrial Average fell 16.91 per cent as it crashed through the 9,000 level for the first time since 2003. Japan’s Nikkei index had its worst week ever, dropping 24.33 per cent.
The Indonesian market lost so much it shut midday on Wednesday and remains closed. The Shanghai Composite Index slid 12.78 per cent.
“I don’t see any near-term catalysts for a recovery,” said Clive McDonnell, head of equity strategy at French bank BNP Paribas. “The market will not focus at all on [valuations] at the moment.”
Investors drew parallels with past stock market crashes.
“This is the worst, but during the times that we had crashes - the ‘80s and ‘90s and all through the last decade - they all felt pretty bad at times,” said Howard Gorges, vice-chairman of brokerage South China Financial Holdings.
He said Hong Kong was a victim of waves washing from the other side of the Pacific, unlike in 1997 - when the city bore a share of responsibility for the Asian financial crisis because it had built up an asset bubble.
Some observers looked back further.
“The comparison we have to make is not with the Asian crisis or 1987,” said Hong Kong commentator Philip Bowring. “It’s with 1973/1974 when ... the index went from 1,700 to 150 at the end of 1974 - that was, in a sense, a global meltdown.”
Some of the issues facing the world now were the same - such as high energy prices - he said, but local investors should keep a sense of perspective. The Hang Seng Index was down only 53.23 per cent from its October 30 peak, compared with a loss of 90 per cent a quarter century ago.
For all that, the market could yet suffer further losses.
Investors shrugged off a series of government overtures, dwelling instead on mounting signs of an economic downturn. Bailouts for major European lenders Fortis and Hypo Real Estate had to be expanded when their capital needs proved greater than expected. Even Bank of America, the giant US commercial lender that acquired Merrill Lynch, sold US$10 billion of stock to shore up capital.
The International Monetary Fund added to the gloom, raising its estimate of losses tied to US loans and securitised assets to US$1.4 trillion, from US$1.3 trillion.
“The market crisis is far from over,” said Steven Yuan, an investment analyst with Chuang’s Finance & Investments. “Problems are coming out one after another, making it very hard to forecast when it will come to an end.”
US and British authorities have tried to put a lid on the credit crisis that has unnerved markets by unveiling plans to pump even more liquidity into their banking systems. And on Wednesday, the US Federal Reserve, the European Central Bank, the Bank of England, and central banks in Canada, Switzerland and Sweden cut rates in an unprecedented, co-ordinated move to jump-start economies and restore confidence. China also cut rates. The Hong Kong Monetary Authority tried to increase liquidity flows by opening up the discount window to smaller banks to give them access to capital.
Yet interbank lending rates have remained high across the world, suggesting that the credit crunch may not be so easily solved and that the financial system may continue to sputter in the near term.
“Confidence in the credit markets hasn’t been restored despite the central banks’ efforts,” said Francis Lun Sheung-nim, a general manager at Fulbright Securities.
He said the Hang Seng Index could drop to 12,000 this month.
The collateral effects of a global economic downturn are also expected to weigh heavily on the balance sheets of companies. General Electric yesterday announced a 22 per cent drop in third-quarter profit, and blamed market conditions.
“The key risk is in regards to earnings,” said Mr McDonnell. “Building in a 20 per cent cut in earnings in 2009 is very realistic.”
Mainland-listed companies may find some protection from an economic downturn because of the robust domestic economy. While it is unlikely to continue its stretch of expanding by at least 10 per cent each year since 2003, the mainland economy should still grow by about 8 or 9 per cent this year, according to most market observers. It has benefited from recent pro-growth policies.
“As Wednesday’s co-ordinated rate cut action failed to quell market concerns, China’s policymakers may consider further monetary easing and more aggressive fiscal spending,” said Jing Ulrich, chairman of China equities at JP Morgan Securities.
While hoping for more market-boosting measures from the mainland, local investors will also keep a close watch on the US economy.
“As long as the US market continues to dive, Hong Kong’s market will be very difficult to turn around,” said Fabian Shin, managing director of ICEA Capital.
“We really do not know what will be the bottom of the market now, but what I do know is that a global economic recession has really begun.”
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The Week the Financial Crisis Became the Great Crash of 2008
Nick Westra, Sean Kennedy and Jonathan Yang
11 October 2008
Panic swept global markets this week, raising the spectre of an imminent economic collapse and unleashing a stock market crash that has only a handful of historical comparisons.
The Hang Seng Index plunged 16.32 per cent on the week and approached a three-year low, closing at 14,796.87. The local market lost HK$2 trillion in value.
US and European markets suffered similar losses. In four days, the Dow Jones Industrial Average fell 16.91 per cent as it crashed through the 9,000 level for the first time since 2003. Japan’s Nikkei index had its worst week ever, dropping 24.33 per cent.
The Indonesian market lost so much it shut midday on Wednesday and remains closed. The Shanghai Composite Index slid 12.78 per cent.
“I don’t see any near-term catalysts for a recovery,” said Clive McDonnell, head of equity strategy at French bank BNP Paribas. “The market will not focus at all on [valuations] at the moment.”
Investors drew parallels with past stock market crashes.
“This is the worst, but during the times that we had crashes - the ‘80s and ‘90s and all through the last decade - they all felt pretty bad at times,” said Howard Gorges, vice-chairman of brokerage South China Financial Holdings.
He said Hong Kong was a victim of waves washing from the other side of the Pacific, unlike in 1997 - when the city bore a share of responsibility for the Asian financial crisis because it had built up an asset bubble.
Some observers looked back further.
“The comparison we have to make is not with the Asian crisis or 1987,” said Hong Kong commentator Philip Bowring. “It’s with 1973/1974 when ... the index went from 1,700 to 150 at the end of 1974 - that was, in a sense, a global meltdown.”
Some of the issues facing the world now were the same - such as high energy prices - he said, but local investors should keep a sense of perspective. The Hang Seng Index was down only 53.23 per cent from its October 30 peak, compared with a loss of 90 per cent a quarter century ago.
For all that, the market could yet suffer further losses.
Investors shrugged off a series of government overtures, dwelling instead on mounting signs of an economic downturn. Bailouts for major European lenders Fortis and Hypo Real Estate had to be expanded when their capital needs proved greater than expected. Even Bank of America, the giant US commercial lender that acquired Merrill Lynch, sold US$10 billion of stock to shore up capital.
The International Monetary Fund added to the gloom, raising its estimate of losses tied to US loans and securitised assets to US$1.4 trillion, from US$1.3 trillion.
“The market crisis is far from over,” said Steven Yuan, an investment analyst with Chuang’s Finance & Investments. “Problems are coming out one after another, making it very hard to forecast when it will come to an end.”
US and British authorities have tried to put a lid on the credit crisis that has unnerved markets by unveiling plans to pump even more liquidity into their banking systems. And on Wednesday, the US Federal Reserve, the European Central Bank, the Bank of England, and central banks in Canada, Switzerland and Sweden cut rates in an unprecedented, co-ordinated move to jump-start economies and restore confidence. China also cut rates. The Hong Kong Monetary Authority tried to increase liquidity flows by opening up the discount window to smaller banks to give them access to capital.
Yet interbank lending rates have remained high across the world, suggesting that the credit crunch may not be so easily solved and that the financial system may continue to sputter in the near term.
“Confidence in the credit markets hasn’t been restored despite the central banks’ efforts,” said Francis Lun Sheung-nim, a general manager at Fulbright Securities.
He said the Hang Seng Index could drop to 12,000 this month.
The collateral effects of a global economic downturn are also expected to weigh heavily on the balance sheets of companies. General Electric yesterday announced a 22 per cent drop in third-quarter profit, and blamed market conditions.
“The key risk is in regards to earnings,” said Mr McDonnell. “Building in a 20 per cent cut in earnings in 2009 is very realistic.”
Mainland-listed companies may find some protection from an economic downturn because of the robust domestic economy. While it is unlikely to continue its stretch of expanding by at least 10 per cent each year since 2003, the mainland economy should still grow by about 8 or 9 per cent this year, according to most market observers. It has benefited from recent pro-growth policies.
“As Wednesday’s co-ordinated rate cut action failed to quell market concerns, China’s policymakers may consider further monetary easing and more aggressive fiscal spending,” said Jing Ulrich, chairman of China equities at JP Morgan Securities.
While hoping for more market-boosting measures from the mainland, local investors will also keep a close watch on the US economy.
“As long as the US market continues to dive, Hong Kong’s market will be very difficult to turn around,” said Fabian Shin, managing director of ICEA Capital.
“We really do not know what will be the bottom of the market now, but what I do know is that a global economic recession has really begun.”
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