Sharemarkets face nervous opening from US turmoil
Political events in the US have provided the trigger for the worst selloff on world sharemarkets since the depths of the credit crunch and global recession early last year.
Despite some strong company results, investors have been spooked by a storm of negative factors, from resistance among some US Democratic senators to the re-appointment of Ben Bernanke as Federal Reserve chairman to President Obama’s radical plans to rein in the banking sector.
The plan, which is still lacking in details and has yet to have any legislative form, aims to make the banks safer for depositors by forcing them to minimise the trading they do on their own account and give up their stakes in hedge funds and private equity firms.
The president’s proposals also include expanding a 10% cap on banks’ market share of deposits to curtail increases in liabilities.
President Obama said he wanted to protect taxpayers from further bailouts and that banks don’t “benefit from taxpayer-insured deposits while making speculative investments.”
Meanwhile, few observers expect Mr Bernanke not to be re-affirmed in a vote that could occur by the end of this week.
A left-field event also caught investors by surprise – the upset in Massachussetts Senate by-election, which saw a Republican take the seat held by Senator Edward Kennedy. This has changed the balance of power in the Senate and threatens to derail administration’s health reform plans.
All of these overshadowed the start of the fourth quarter reporting season, in which most companies have actually performed above expectations – though in some cases these have proved inadequate to some investors’ hopes.
The blue chip benchmark Dow Jones Industrial Average has slid 5.2% in past three sessions, the most since last March, just before it began strong rally that took the index up 55% from its low.
Overshadowing these political factors was concern that the Chinese economy was overheating and efforts to dampen will slow the global recovery.
While the impact of the political issues could be short-lived, any setback in China could have longer lasting effects as the politically stimulus programmes are wound down.
These concerns were raised by one analyst quoted at the weekend in the Wall Street Journal.
"The big lift to the market in 2009 was the extraordinary amount of monetary and fiscal stimulus around the world," said Peter Boockvar, equity strategist at Miller Tabak.
"If the economy were robust, we could handle it, but so much of the improvement has been due to stimulus that no one knows what the economy, standing on its own two feet, will look like when support is pulled away."
Australasian sharemarkets are expected to open weaker today in a continuation of investor jitters, just as surely as shares prices will recover as new long-term considerations take precedence.
In a pointer of what is likely to occur more immediately, Gulf sharemarkets yesterday fell sharply as they opened after the weekend.
Dubai’s index lost the most in a month, falling 5% in its worst drop since the December 9 debt crisis sparked by the emirate’s government holding company declaring a standstill on repayments.