Stephen Gunnion
27 October 2008
Johannesburg — WORLD markets went into a tailspin on Friday as the UK and the US confirmed recessionary fears, the Organisation of Petroleum Exporting Countries (Opec) slashed oil production and global institutions were forced to sell shares to raise cash. Stock markets plummeted and currencies came under fire.
The rand and other emerging market currencies swung wildly. The rand traded between R10,79 and R11,77 to the dollar, before closing at R11,18/$.
Sterling had its biggest intraday drop against the dollar in at least 37 years after the Office for National Statistics said Britain's economy shrank by a larger than expected 0,5% in the third quarter.
This confirmed Prime Minister Gordon Brown's prediction last week that a recession was likely, and deepened fears of global recession.
The US economy was expected to have shrunk by a similar amount in the third quarter.
The Australian dollar dived 8,4%, while the New Zealand dollar tumbled 7,1%.
Robert Macintosh, chief economist at Eaton Vance Corporation in Boston, said: "This has become much more global than it was two weeks ago. No one or no market is immune.
"People are running to safety," he said. "It is interesting how the dollar has been bashed for years, and that is the currency that everybody wants to own."
Alvise Marino, emerging market economist at IDEAglobal in New York, said the rand's volatility could be explained by extremely low volumes.
"Regardless of the abundance of negative factors affecting SA at the moment, needless to say that the (foreign exchange) market remains dominated by international developments," Marino said.
"Now that international credit markets have shown a significant improvement, the spotlight has shifted to global equity markets and fears of a deep global slump in growth."
Despite Opec's production cut, oil prices kept sinking on fears of falling demand in a recessionary environment. London Brent crude was down $3,24 at $62,68.
While energy analysts said Opec needed to make bigger reductions to stop oil falling to $50 a barrel, the UK and the US criticised the cut. The White House denounced Opec's "antimarket" decision. Brown said he was "disappointed" by the output reduction, and urged oil producers to show a responsible attitude during the crisis, his spokesman said.
Iran, Opec's number two oil producer, said yesterday that the cartel was likely to cut production further if the latest reduction did not stabilise crude prices.
Gold also fell, while US government bonds surged as investors piled into this traditional safe haven. As institutions were forced to sell stocks to raise cash, markets slid around the globe, with the MSCI's all-country world index down 6,5% as panicked investors moved to liquidate risky positions.
On the JSE, the All Share closed 5,8% lower at 18 459. London's FTSE shed 5%, while the Cac 40 in Paris closed 3,5% lower. In New York, the Dow Jones closed 3,6% weaker.
Doug Blatch, head of equities trading at Investec Asset Management, said momentum in the market still seemed to be to the downside, with investors looking to an emergency meeting of the group of 20 leading nations as the next salvation.
While G-8 leaders had already met on the crisis, Blatch said it was important to include emerging markets in any co-ordinated efforts as the crisis had spread. Credit default swaps on the sovereign debt of many emerging market countries had surged.
"It's no longer just a corporate credit issue, but now a sovereign default issue," Blatch said. "Everyone is now worried about sovereigns' ability to repay debt and that just adds additional momentum to the downside."
Co-ordinated efforts by countries to halt the turmoil would help, but increasingly countries were going it alone, Blatch said.
Denmark raised interest rates on Friday to protect its currency. Sweden cut its the day before.
With Reuters, Bloomberg
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