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Goodbye to a volatile year

Ajay Jaiswal

WHEW! What a year it has been. This year was ushered in with grand celebrations of the new millenium.

There was anxiety over the impact of the Y2K. Y2K did not have any significant affect across the globe. At the beginning of the year world economy was looking upbeat with American economy showing no signs of any geriatric strain. American economy also se emed to pull the rest of world with it.

The recession that had set in Asia after the crisis was clearly showed signs of disappearing. Stock markets were buoyant and created wealth across the world. The `wealth affect' resulted in increased consumer spending.

Information technology was set to change the business paradigm. New economy stocks were gaining at the cost of old economy. Productivity remained the buzzword and even the Federal Reserve Chairman, Mr Greenspan, was confident that American economy would not get overheated as the increase in productivity was keeping pace with the growth in demand.

It's been a volatile year in the financial markets. Volatility was seen in the currency, equity and even the commodity markets.

One clear victim of the accelerating US economy was the Euro. Euro saw a high of 1.0414 at the start of this year and struggled through the year. It lost twenty one per cent of its value and touched a low of 0.8225. The selling on the unit did not have a strong speculative element.

Over the last few years large capital investment from Eurozone to America was resulting in the selling pressure. This made it difficult for European Central Bank to prevent the slide in its value. ECB intervened numerous times in the currency markets but failed to reverse the course.

Last fortnight has seen a reversal in fortunes of Euro. This appreciation in Euro is more due to dollar weakness. ECB can take comfort in the clear signs of slowing down of the American economy.

Federal Reserve did not move on the interest rate in its meeting on December 20 but has clearly changed the bias and has indicated that it would be ready to cut rates to prevent a sharp slow-down.

Equity markets started the year on a buoyant note but quickly got caught in a bear hug. Optimism surrounding the technology, media and telecom shares was quickly scaled back. There was a spate of failures of internet-related companies.

Volatility in the energy prices also affected the profitability of companies across the world. Crude prices remained firm through the year although they have moved sharply lower in the last fortnight. Energy costs for companies in America went up by almo st 40 per cent compared to the previous year.

World came close to an oil shock when crude futures for the near month breached 36 dollars-a-barrel, which was the highest level seen after the Gulf war.Technology intensive index NASDAQ saw a high of 5132 in the beginning of the year. The index plunged and lost 55 per cent of its value to touch a low of 2288. Similarly Dow lost over 17 per cent of its value to touch a low of 9654 this year. There are still no signs that the bear phase has abated.

We feel that Fed would have to resort to aggressive rate cuts next year to prevent a hard landing. Companies would be comforted by lower interest rates, but the profit warnings would continue to hound the market in the first quarter. It would be a tough challenge for Federal Reserve to ensure that consumption spending doesn't drop sharply.

Japan is back in the mess that it has been trying to pull itself out from over the last few years. We saw Bank of Japan and Japanese Government showing strong faith in reversal in the economy.

BOJ moved away from the zero interest rate policy and hiked interest rates by 25 basis points. The move was clearly ill timed and there are signs that Japan is slipping back in recession.

Fiscal reforms have taken a backseat due to lack of strong political will. Corporate bankruptcies remain at the highest rate in the last decade. It would be difficult for Japan to pull out of the recession through strong exports when American economy is slowing down.

Equity markets in Japan are also in a bear hug. Nikkei saw a high of 20,833 this year and lost over 36 per cent of its value to touch 13,182. There is a clear outflow of capital investment from Japan. Dollar has rallied against yen and breached 113.00 le vel in spite of its weakness against the rest of currencies.

The year has seen reversal of trends in various markets. Let's hope the New Year brings some cheer back to the markets.

(The author is Senior Manager, Corporate Treasury Sales - Southern India for HSBC. The views expressed herein are his own and not necessarily those of his employer.)