Volatility, and a dysfunctional market
Wall Street was up some 10% overnight, as the markets turned from depressed to euphoric over the prospects of a 0.75% rate cut, which is now the subject of widespread speculation in the US. Some analysts (see further down) now predict a fed funds rate of zero per cent, as the global authorities now appear to mobilise their entire arsenal of policy options to contain a global depression.
The rally came late however. European stock were still down, but this will almost certainly change this morning – but judging by past experience, this bull runs on the back of interest rate euphoria tend to be short-lived. An exception was Germany, which yesterday saw probably the most extraordinary day in its financial market history. It was a classic short squeeze – the kind of which we had in the early 20th century, when stock market regulation was not that sophisticated. See Brad Delong for a useful remind of similar historical experiences.
The events were triggered by Porsche buying up of 74% of VW in the form of derivatives. The shares skyrocket, as hardly any free shares are left in the markets, and as funds are forced to buy shares to maintain the VW proportion of their Dax portpolios. The shares have quadrupled in the last couple of days as a result, and VW last night constituted some 27% of the entire Dax index. As for superlatives, the company briefly became the world’s largest company by market capitalisation yesterday morning, which is quite absurd. The Frankfurt bourse decided to cap VW’s share in the Dax to 10% from Monday, according to Bloomberg, which means that the share may come tumbling down as fast it rose, and with it the Dax, which had gained some 10% in two successive days because of VW (it would have fallen otherwise). A mixture of financial panic and amateurish regulation has produced a completely dysfunctional market.
Tremonti and Draghi struggle to remain calm
While the Germans are all over the place, the Italians try to remain calm. Corriere della Sera has an article on a financial stability summit, headed by Giulio Tremonti, Mario Draghi, who were at pains to underline the solidity of the Italian banking system. So far they noted, overall credit was still rising, but there was a clear nervousness that that situation might soon reverse. Discussions are still continue how to stabilise money market, or whether to force banks to raise their capital.
Why Steinbruck is sticking up his finger to his European friends
In an otherwise dull interview with Frankfurter Allgemeine Zeitung, Peer Steinbruck defended the decision to stick up his finger to the euro area wide rescue plan. He said a euro area wide rescue plan was not acceptable to Germany, because Germany would have to pay the lion share, and have only limited controls. (This is a very disturbing statement in our view). He said one should ensure that euro area summits remain the exception, not the rule. He gave two reasons. The first is that such summits raise expectations. The second is that Europe gets divided into a euro area, and the remaining 12 member states.
Employment fears on the rise in France
Fears of widespread job losses in France knocked consumer confidence more than expected in October while company chiefs warned of further possible job losses, reports the FT. Statistics office INSEE’s barometer of consumer morale slid to minus 47, back to the level seen in July, when the reading dropped to its lowest in more than 20 years.
Subsidised employment to stop rise in unemployment..
The gloomy prognosis comes just hours before Nicolas Sarkozy unveiled a raft of measures to “mobilize the job market”. His measures focus on preventing unemployment from rising. The most prominent measure is the creation of 100000 new subsidised work contracts from now on until 2009, other measures include the extension of the transition contract and increase the use of fixed term labour contracts (see Le Monde for a complete list). His plan runs counter his party’s pledge and his own campaign promiss to abstain from such market manipulating measures. Defending his project, Sarkozy said that one has no right to indoctrinate amid human misery. Socialists have their go on him (see Liberation) and according to Le Monde he also failed convince the right.
…just as his predecessors did
In an interview with Le Monde Jacques Freyssinet says that Sarkozy is doing what all his predecessors did, whenever unemployment is rising, to raise employment ‘artificially’ through subsidized work contracts. While expensive it is the fastest way to reduce unemployment figures.
Fed to cut rates to zero per cent according to Larry Meyer
Larry Meyer, a former Fed governor, who now runs a research boutique, predicts that the Fed will end up cutting the Fed funds rate to zero per cent by the middle of next year, as unemployment is expected to go up from 6.1% to 7.5%, according to the Wall Street Journal economics blog. They also expect GDP at -2.8% annualised in Q4.
Martin Wolf warns of deflation
In his FT column, Martin Wolf warns of a descent into global deflation, which if not prevented could lead to the destruction of free market open economics. He advocates a full 1 or better 2 percentage point fall in western interest rates (though in the US, the latter suggestion is hardly possible). He believes that the world is heading for a very dangerous slump, and say conservative commentators are ludicrous if they say that it was government intervention, not free market excesses were responsible for this crisis.
Icelanders favour EU membership
It is always astonishing to see how a good financial crisis produces clarity people’s minds. Jean Quatremer finds that the EU membership has risen from under 50% last year to almost 70%, and even more people are in favour of dropping the krona for the euro. So the speculation is rife whether Iceland is member state number 28. Since it is already a member of the EEA, those negotiations could be wound up pretty quickly.
German raise savings rate
German consumers have raised their savings rate to 11.3% of disposable income, the highest level since the mid-1990s, Frankfurter Allgemeine reports. In the first half of 2008, the savings rate increased by 0.5 points against the previous year. Germany’s statistics office said the figures reflect the downswing, but not yet the financial turbulence of recent weeks. The good news from Germany yesterday was that the consumer climate has remained stable (although at not a very high level).
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