Business

Global stock markets in correction mode

Batuk Gathani

There is an underlying fear of rising interest rates although the U.S. Federal Reserve has been progressively tightening the U.S. interest rates, ostensibly to contain inflation pressure.

LONDON: A relative calm has now descended on stock markets in the U.S. and Europe after the recent turbulence. The markets have stabilised and major stocks have registered a modest gain, except General Motors, which has been hit by heavy losses incurred by its European subsidiaries, and the company has skidded to a $1.1 billion deficit. Despite such relative calm, gloom has descended on the financial markets about the poor prospects of world economic growth and profits. Only six weeks ago, the Dow Jones Industrial average was trading at a four-year high, less than 7 per cent below its all time peak. Since last week, western investors on both sides of the Atlantic were seen passing through a phase of edgy nervousness, as the U.S. shares turned somersaults, and major global stock markets tumbled as investors abandoned `risky assets'. The U.S. stocks have shed their value by two to three per cent. Japan was the worst hit on deteriorating Sino-Japanese relations.

The European high-tech shares in Germany fell by 2.5 per cent. In key Asian markets the spillover effect is being felt. Hence, debate in major European financial capitals on Wednesday is about the duration and size of `correction', which has been widely predicted with recessionary trading and economic conditions.

The only silver soling is that oil prices have stabilised from their recent peaks, but investors are shunning risky securities on fears of an economic slowdown.A prominent analyst points out: "There is fear about the economy — people are focusing on negatives and hence there is a pullback in terms of the risk that investors are willing to trade." There is an underlying fear of rising interest rates although the U.S. Federal Reserve has been progressively tightening the U.S. interest rates, ostensibly to contain inflation pressure. The European Central Bank has initiated modest interest rate rise but many investors are wondering for how long can low interest rates be sustained in a highly recession-prone European economy. The European unemployment level, with the sole exception of Britain, remained high and could soon plunge to a double-digit figure.

Till March 7, the stock markets had peaked but over the next 22 days the Nasdaq index fell 3.9 per cent. Most investors are now wondering if the next financial crises are looming on the horizon amid realisation that two-year-old global stock rally may soon end. From their lows in March 2003, German stocks have risen by 80 per cent and the French stocks by 70 per cent. Italian shares calmed 66 per cent and the British and Swiss stocks rose by 62 and 51 per cent. Hence, today there is an underlying fear that eclipse of the bull market may now be in the offing.

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