How the tiny Dubai has its sway on the global stock market?

The global stock market wake up to a rude shock when it was official that the state owned Dubai world and its real estate subsidiary Nakheel were in deep debt trap. The consequences of the Dubai fiasco had its share on the global stocks marked by the U.S. Standard and Poor 500 index fell by 1.7 per cent on November 27th and the Dow Jones real estate index too was down by 2.9 per cent.

When the Dubai sneezed, the Mumbai sensex caught cold by shedding about 400 points on the Friday, the November 27th. The official declaration about the Dubai debt trap revealed that it owed more than eighty billion dollars. The financial experts attributed the fiasco to non transparency in financial dealings which could possibly affect the entire global markets adversely.

The Dubai trap reminds us about the sub-prime crisis, started a year ago in the United States which laid the foundation for the subsequent stock market crash and global recession. The similarity in the sector that was targeted (real estate) shook the business confidence around the world. The US dollar started strengthening against the global currencies during the last week of November which will in turn exert great pressure against the equity markets globally.

The scenario before the crisis!

Before it was officially declared that the Dubai real estate is in red, the city was known for its conglomerate of real estate companies. It had the potential to become a world financial centre but for the bubble that had burst recently. It was considered as a status and symbol among the opulent and the super rich around the world to own a piece of real estate either as office or house in Dubai. Even those who can’t afford to have their share of cake sold their property elsewhere to have a root in Dubai to their own dismay.

The international rating agency, Standard and Poor’s, downgraded its ratings on many of the entities owed by the Dubai government due to the debt. Obviously it is seen that the world hasn’t learned the lesson it ought to, even after the sub-prime crisis and the Dubai real estate debt came as a real shock to those who had seen a silver lining in the recent economic recovery and upward movements in global equity markets. How the world will cope up with the recent Dubai debt and its effect on future stock movements across the world will be any one’s guess!

Emerging markets better developed nations in stock

Robust growth in India and China has helped to pull the markets up and thus the stocks in these countries outshine the rest of the developed nations during the year 2009. But there is a bad news for these two countries as per the report of “Survive and Prosper – Emerging Markets in the Global Recession” which predicts that these two economies would contract in the later part of this year.

Another report says that with the exception of Eastern Europe, the emerging market economies fare better than the developed countries which are definitely a silver lining in the offing. The report further adds that emerging Asian Tigers including India will remain the favorite investment destination in the years to come. Asian markets figured in the top ten list of the preferred destinations among the non-BRIC countries which is inimical to the growth of the stocks in the Eastern Europe.

The market movement in India and China showed that there is a degree of independence from developed economies as far as stock growth in concerned but the GDP gap between the developed and emerging nations remained at about 6 percentage which shows that there is a certain degree of dependence. But there is no second opinion in that the emerging markets support the global profitability. Global companies which had their branch office in emerging nations reported brisk business even during recession compared to that located in developed nations.

However, the investors are prepared to stay the course and are of the opinion that the investment from emerging markets would be better in the long run and the wait would be worthy.

Stocks on low ahead of Fed meet

Most of the markets remained closed on Monday due to holidays and the investors are keenly watching about the moves of the Fed Chairman Ben Bernanke whose reported remarks about the recession in the US as ‘likely over’ which helped the stocks to move northward during the past week. The Dow Jones industrial and Standard and Poor’s 500 index went down by 0.6 per cent in early trading.

US Recession - On the end?

The recession that has been sweeping across the globe did come to a full circle. Didn’t it? The grip of the recession on the global economy, especially that on the U.S. had come down but not yet ended at all. A survey conducted by the National Association for Business Economics’ industry found that though the demand is stabilizing, but a small majority of the respondents said that the bottom is yet to be seen.

There is a conflicting version about the degree of the deleterious effect of the recession among the industrialists. While one school of thought advocates the theory that the U.S recession is abating with few signs of immediate recovery, another group simply advocates the opposite. The results for the industry demand still declining in the second quarter of 2009 but the rate of decline has reduced considerably.

While the sector that showed tremendous recovery prospects is financial services with the index bench mark reading at +15, transportation, communications and information sectors fared poor.

The recession in US that started during December 2007 might be considered the longest one since the Great Depression that wreaked havoc across the globe. The optimists in the financial business look forward to see a recovery during the second half of this year but going by the present trend, the recovery process may take more time and further it is likely to be sluggish. But one can find solace in the rate at which profits are shrinking is slowing.

CIT in trouble?

Last Sunday saw hectic activity that culminated in a deal in which the CIT Group Inc's board signed off an agreement for $3 billion and it is hoped that this move will help to stave off bankruptcy. The bondholder group, which comprises Pacific Investment Management Company (PIMCO) and some other top CIT holders, is expected to provide the financing with a 2 1/2-year term to ease out the situation.

The $3 billion financing plan will be backed by CIT's remaining unsecuritized assets, which likely exceed $10 billion, the second source familiar with the matter said.

The problems of the CIP can be tracked back to the sub-prime crisis when its Chief Executive Jeffrey Peek decided to expand its activities into sub-prime mortgages and student loans which are lucrative and highly profitable but fraught with danger and added risk.

As per the independent research firm CreditSights, CIT has about $40 billion of long-term debt. It is worth to note that about $1.1 billion of debt will come due in August, followed by about $2.5 billion by the end of the year.

The tug of war between the gold and crude oil!

The rise in crude prices halted after four days of continuous surge owing to the forecast that fourth quarter contraction of the U.S economy was steeper than expected. The estimate points out that gross domestic product fell at an annual rate of 6.2%, the worst since 1982.

As the dollar showed an improvement, oil took a beating and so too the appeal of commodities as an alternative investment. The drop in crude prices happened despite the OPEC’s decision to curtail production in a bid to boost up the crude prices. It seems that the demand-supply theory doesn’t work very well here in deciding the crude prices and the data on the economic growth especially that of the U.S has a bearing on it.

In the New York Mercantile Exchange, the April delivery crude oil futures fell 46 cents or roughly 1per cent to $ 44.76 a barrel. This has to be viewed from the context that the price of crude has dropped to a whopping 70 per cent from its July 11, 2008 peak of $147.27 a barrel.

Gold loses its sheen

The past week saw the gold shed some of its sheen with 6% drop in its value, mainly because of the appreciation of dollar which rose to the highest in almost three years against six major currencies. But analysts point out that the gold bull run is far from over and it is mainly due to worries that paper currencies are being debased, especially given the tight economic situation and liquidity being pumped in to the financial system.

The demand for gold stems from the jewellery business and some of the Asian countries, especially India being the major consumer. It is hoped that the price of gold will stabilize during the second half of the next year.

It is the turn of auto industry to fall!

Falling in line with the banks after the sub-prime fiasco and the insurance giant AIG, is the auto major General Motors, which is struggling and planning to file a bankruptcy. Competing with the General Motors in the financial bungling is the Chrysler and Ford Motor, although the cash position of the Ford is far better than the GM.

When the economy is unrestrained, it is a common practice to allow the markets to determine the fate of the private companies but the present situation is entirely different and needs special attention. Ms. Dana Perino, the US President’s spokesperson was of the opinion that there were plans to use other options including the use of Troubled Assets Relief Program (TARP). The US president George W. Bush may allow the US treasury to channelize the money to Detroit from the $700 billion earmarked for the bailout, announced earlier for lifting the ailing financial institutions.

Chrysler is in need of $7 billion from government as loans while General Motors requires a whopping $18 as loan to survive the worst ever recession in the auto industry since 26 years. The failure of the US bailout of the auto majors is seen as a backward step for the distressed US economy and the lay offs from auto industry would add to the already burgeoning unemployment rate, which is increasing alarmingly as the day progresses. The new president elect Mr. Barack Obama will have a daunting task before him when he assumes office.

Slump in auto industry and its effect on crude

The collapse of the $14 billion bailout package to rescue the failing US auto industry triggered the fall of crude prices to approximately $45 in the e Trading on Friday; this happened at a time when the OPEC countries are pressing for a cut in the production of crude to shore up oil prices.

Will the Obama magic work for the financial recovery?

Mr. Barack Obama has made history and made changes in the occupant of the white house by his passion for “change.” The election to the office of the president of Obama is partly attributed to dismal policy adopted by the incumbent, George Bush.

The president elect has vowed to push an economic stimulus package through the Congress immediately when he takes over the office in January, 2009. At his first news conference in Chicago after the announcement of the results he said, “This morning we woke up to more sobering news about the state of our economy.”

One of the major tasks that require the urgent attention of the new president is the high unemployment rate which hovers around 6.5 per cent, the highest in the last 14 years. He was having consultations with the billionaire investor Warren Buffet, CEO of Google, Eric Schmidt, former Federal Reserve chairman, Paul Volcker but desisted from arriving at any major decision at that time.

On the tax front, Mr. Obama said he and his advisers would continue “to take a look at the data and see what’s taking place in the economy as a whole” and planned to announce a tax cut which would benefit 95 percent of the Americans. Another industry that cries for Mr.Obama’s attention is the automobile sector and small businesses, assistance for the state and local governments.

The average American has his heart filled up with hopes that the new president elect can do something to lift the sagging economy and in turn can improve the living conditions. But the million dollar question is “How long will it take to improve the liquidity flow and reduce the unemployment rate?” Let us hope that happens soon.

Slowdown or recession?

"The US is plunging into a nasty recession with a lot of suffering to come even if policy makers succeed in unfreezing the credit markets” quipped Mr. Paul Krugman, winner of the 2008 Nobel Prize for economics and Professor of Princeton University and New York Times columnist in an interview. He referred the situation as “baked in” and continued to add that there was a lot of downward momentum and put the unemployment rate at 7per cent, the highest figure in the past five years. The chances of the US economy falling into recession intensified with the report that retail sales had fallen for the three straight months.

What is the difference between recession and slowdown?

Many people mistake economic slowdown for recession. However, textbooks define recession as a period of two consecutive quarters of negative economic growth as measured by a country’s GDP and is expected to last anywhere between six and eighteen months. Economic slowdown on the other hand is just a slower growth in economic activities. The impact of economic slowdown may affect particular sectors whereas recession will have a wide ranging impact on most of the industries.

What is the source of concern?

It all started with sub-prime crisis in the US and the reasons for the crisis are now known to everyone. It has resulted in fall in real estate prices across US as home loans were foreclosed and the starting price of many of the properties started with an asking price of $1.99. Many important things that followed suit included the fall of Lehman brothers and with a concomitant fall in the value of Dow Jones and NASDAQ to 29 per cent till this day.

I live outside the US and am I safe?

The international economy has become like a single family because of globalization and the interdependent nature of each sector. That is the reason why when US sneezes, the rest of the nations suffer from cold. It may sound like a joke but it is true because the US is the single largest producer of natural resources. Whenever the crude skyrockets, the impact will be felt more by the Asian tigers like China and India. So, it is not a question where do you live but you are affected by the slowdown in one way or other.

Be prepared for that and fasten your seat belt.