World Week Ahead: Volatility makes a return

Monday 19th April 2010

It’s back and complex financial products are at the centre of the biggest challenge yet to the global equities rally.

Markets have been on a tear for the better part of a year, with financial stocks helping to pace the rebound. If Friday’s plunge on Wall Street is a sign of what lies ahead, investors are looking at a tough few days.

For those who haven’t yet heard, Goldman Sachs Group Inc was charged on Friday with fraud for its role in the sale of collaterised debt obligations linked to sub-prime home mortgages in the US because it failed to disclose that the securities were specifically chosen by a hedge fund manager who then bet that their value would drop.

After the US Securities and Exchange Commission said it sued the Wall Street firm, Goldman’s shares sank. By the market’s close on Friday, Goldman’s shares were down 13%. Deutsche Bank AG shed 9%, Morgan Stanley 6% with both Bank of America and Citigroup down 5%.

Merrill (now owned by Bank of America), Citigroup and Deutsche Bank were the top three underwriters of CDO transactions in 2006 and 2007, according to data from Thomson Reuters

On the weekend, UK Prime Minister Gordon Brown called for an inquiry by Britain’s top financial authority and Germany’s financial regulator asked for details on the SEC’s investigation.

The decision to charge Goldman could provide the fuel to get new regulations into place in the US, which could damp future profits.

The VIX, or Chicago Board of Exchange volatility index, surged 15.5% on Friday.

Shares in the US had been on a steady, albeit, more moderate rise during the last six weeks, bolstered by some solid results in the early part of the first-quarter earnings season.

While Alcoa Inc, Bank of America Corp, General Electric Co and Google Inc reported results that failed to meet some expectations, Intel Corp, CSX Corp and JPMorgan Chase & Co provided enough good news to stoke investors’ optimism.

Results are pending this week from 11 members of the Dow Jones Industrial Average and 123 companies in the Standard & Poor’s 500, including Apple Inc, Coca-Cola Co, Johnson & Johnson and Microsoft Corp.

Last week, the Dow edged up 0.2%, the S&P500 slid 0.2% and the Nasdaq rose 1.1%.

In Europe, Greek’s fiscal woes were pushed to the side by the Goldman news. The Dow Stoxx Europe 600 ended the week down 0.7%, reflecting heavy selling in the final hour of trading.

“Markets will now probably enter a period of moving sideways until there is some confirmation on economic recovery in the longer term,” Ineke Valke, a strategist at Theodoor Gilissen Bankiers in Amsterdam, told Bloomberg News. “Momentum seems to have passed.”

The Goldman news of course had an effect on the currency markets, and the big winner was the yen.

The Dollar Index, which measures the greenback against a basket of six major currencies, rose 0.48% to 80.82.

Against the yen, the US dollar dropped as did the euro as well as both the New Zealand and Australian dollars.

The yen rose 1.1% to 92.17 against the greenback on Friday. It rose 1.1% versus the euro to 124.44. The euro was flat against the U.S. dollar at $US1.3503.

In Europe talks are set between the Greek government, the European Union, the International Monetary Fund and the European Central Bank this week. While Greece has been able to sell new bonds to help refinance some of its debt, the premium required to attract investors has been steep. It appears likely to accept somewhat better terms from the EU and the IMF.

On Friday, both gold and copper fell after Goldman was charged with gold losing some appeal as an alternative asset and copper losing some appeal as a hedge against inflation.

The Reuters/Jefferies CRB Index, which tracks 19 raw materials, fell 1.2% to 276.29.

Goldman isn't the only cloud hovering over markets. Ash from an erupting volcano in Iceland continues to hamper air travel throughout Europe with more than 63,000 flights cancelled since Thursday and most airports poised to remain closed through Monday morning.

Businesswire.co.nz

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