Focus: Specter of Late 2008 Haunting Global Financial Markets

20 May 2010, 2:27 p.m. EST
By Debbie Carlson
Of Kitco News


Chicago -- (Kitco News) --Not since the fourth quarter of 2008 have the financial markets felt so queasy over the state of global economic affairs.

At that time the world was reeling from the start of the credit crisis and now it is revisiting whether or not a nascent economic recovery was really just the start of a double-dip recession.

There’s plenty of uncertainty around and the one thing financial markets loath is a cloudy future. Shakiness in Europe – from indebted southern tier countries to Germany banning naked short-selling, fears over rate hikes in China slowing economic growth there, financial regulation in the US, potential inflation worries and other economic gremlins are vexing investors and there are no signs it will let up soon.

“There is some real fear in these markets. The VIX volatility index is high, the Nasdaq is seeing its largest losses since November 2008,” said Spencer Patton, president of Steel Vine Investments.

The VIX is the Chicago Board Options Exchange Volatility Index, which measures the implied volatility of the S&P 500 index options and is commonly called a “fear gauge.” High value suggests a more volatility market and is a measure of how volatile the market will be over the next 30 days. On Thursday the VIX rose 26% by the early afternoon. 

Market analysts said market participants are coming to grips with possibly lower economic growth, particularly in the EU. That will affect all commodities – from metals to energy to agriculture.

“It is still unclear as to how long it will take the EU to straighten out their financial mess, which means it may be some time before we see commodity demand return in that region,” said Karl Setzer, commodity trading adviser at MaxYield Cooperative. "News that the EU may limit speculative trading in financial and commodity markets, a move that has traders think it may take place in the US if it happens there. While this is a possibility, it is doubtful it will happen any time soon in the US."

Patton said while there are a lot of bearish economic events hitting markets lately, he believes that there might be more downside. “We haven’t seen the culmination of events yet. We haven’t seen panic selling; we haven’t seen capitulation yet,” he said.
Some market analysts believe that the wider markets, like the stock market, are readjusting their growth forecasts. The U.S. stock market received a dose of bearish news Thursday when weekly jobless claims jumped by 25,000. They said U.S. equities are removing some of the “excessive bullishness” that pushed indexes like the S&P 500 and Dow Jones Industrial Averages up sharply in February and March and that this is a healthy move. 

Patton said he could see the Dow falling under 10,000 and the S&P under 1,000 before finding support.
In the short-term, several market analysts said it is important that the global equity markets not start to feed off each other’s weakness in a vicious circle. If Asian or U.S. market can stabilize, then equities might be able to consolidate.

Patton said also in the very short-term, investors need to watch the results of the German parliamentary vote on the IMF/EU bailout package. “If that doesn’t pass, everything will become unglued, but it looks like it will pass,” he said.

Like other markets, gold fell Thursday, but the losses are limited. Margin call selling and long liquidation hit gold. In gold’s recent rally many buyers came in near the top, so the spike lower in prices are leaving those investors with losing hands. Those investors have a decision to make – sell at a loss, or try to shore up positions. Likewise, investors who might be sitting on still-winning gold positions but are getting margin calls in other markets could be cashing in their gold to fund the margin calls.

Patton said the break in gold is needed, but he still doesn’t see a reason to buy yet. “It’s closer to looking attractive; I’d look to by at $1,150,” he says.

However, he added, he just doesn’t like gold’s action in the wake of all the current turmoil, saying the current uncertainty should support gold prices. “I don’t know why people are buying. Where will you get a 5, 10, 15% return if this (current market action) is not going to do it,” he says.

--By Debbie Carlson, contributing to Kitco News;