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Bloodbath in world markets

25. September 2011. | 10:25

Source: Voice of Russia

World stock exchanges finished the week with a serious fall. Sales began in the USA on Wednesday night, to be followed by Asian markets and finally by European markets

World stock exchanges finished the week with a serious fall. Sales began in the USA on Wednesday night, to be followed by Asian markets and finally by European markets.

The main reason was the declaration of the US Federal Reserve System (FRS) about changing its monetary and credit policy. Poor European statistics added pessimism, and rating agencies made their contribution by reconsidering the ratings of US largest banks and lowering Italy’s credit rating.

Traders have a saying: market is bleeding. This is a very good description of what happened in the two last working days of this week. The situation is likely to cause panic and the growing number of experts predicts a repetition of the 2008 scenario. A wave of asset sales covered Asian stock exchanges on Thursday when indexes fell by 5%. This had a negative effect on Russian markets. In the Old World the leading indexes fell by 3-5% to be followed by an over 3% fall at US stock exchanges. The situation remained unchanged on Friday, with the exception of the USA where there was an inconsiderable rise. It is not clear how long the rise will keep, though.

Estimating the reasons for the sales, analysts name several factors. Firstly, very poor European statistics were published this week. Secondly, the Standard & Poor’s rating agency lowered the ratings of seven Italian banks and of Italy itself. The main factor was news from the USA. On Wednesday night the Moody’s agency lowered the ratings of US largest banks, such as Wells Fargo, Citigroup and Bank of America. On top of this the FRS decided to change the structure of its assets by reducing the number of short-term bonds and increasing that of long-term ones. $400bln will be spent on this by July 2012.

The foreign exchange market situation is also dramatic. The Forex euro-to-dollar rate dropped below 1.34 on Thursday for the first time since February. Investors fear that Greece may fail to receive the next installment of the stabilization credit. Problems of European banks also have a negative effect on the euro rating. The rouble-to-dollar rate dropped by over 70 kopecks over Thursday and Friday, exceeding the rate of 32 roubles per dollar for the first time since September 2009. This situation was also caused by negative external factors, expert of the Otkrytiye financial corporation Alexander Laputin says.

"The growth of the dollar is evidently caused by problems in the world economy. The two-currency basket has approached the limit set by the Central Bank of Russia. I recommend paying close attention to the steps the Central Bank will take now.”

Last weeks disputes about rating agencies were resumed. They were accused of being biased and fanning panic in the market. Even the two previous months give much food for thought in this respect. On the 5th of August Standard & Poor’s lowered the US rating for the first time ever. The markets experienced a shock but the world did not collapse. Moody’s and Fitch preserved the highest US bonds rating then. In July the three rating agencies lowered the ratings of Portugal, Greece and Ireland to junk which raised investors’ panic and sales of assets again. Later everything returned to the status quo but someone made billions out of market fluctuations.

Experts believe that rating agencies decided to change their strategy after the crisis of 2008-2009 when they missed the collapse of the mortgage market and the banking industry. Now Standard & Poor’s, Moody’s and Fitch play double safe and lower the ratings of companies and even countries in advance. This is the opinion of Andrey Gritsenko, the head of the company “Kapital. Asset Management”.

“They have to do this because they missed the latest crises. Once bitten, twice shy. The situation with Italy was ridiculous. That country follows all EU instructions and they go and lower its rating. I understand lowering the rating of those who do not follow recommendations. What’s the point of punishing Italy? These changes in ratings cause universal nervousness”.

All experts agree that the current fall will be protracted, even though it will develop by fits and starts. The head of the Goldman and Sachs Asset Management Jim O’Neill predicts a crisis similar to the one of 2008. He believes that this will happen if the Euro zone debt problems persist and spread over to the US banking industry.


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