Tony Daltorio: Fear has become the dominant emotion among equity investors in world markets, as stock markets have gyrated in this summer of discontent.
And the fear is easy to see in the record high prices for gold, the Japanese yen and even U.S. Treasury debt.
The gold contract for August delivery rose to as much as $1,874.40 an ounce — a record — leading to some to speculate that $2,000 an ounce may be reached soon.
“I find it hard not to see $2,000 by the end of this year,” Adam Klopfenstein, senior commodity strategist with MF Global, told Dow Jones. “Heck, I think we’re going to see it by the end of this month.”
Currency traders priced the dollar at ¥75.94, a record low, prompting Japan’s top currency bureaucrat to complain it should not be a safe haven for investors seeking shelter.
“We don’t think recent yen moves really reflect economic fundamentals,” Takehiko Nakao, vice finance minister for international affairs, told Dow Jones.
In a country still trying to recover from the March earthquake, a declining population and a stagnant economy, “there is no reason that the yen should be regarded as a flight-to-safety currency,” he said. Besides, the increased value for the yen cuts in to profits for its top companies, all major exporters.
Many benchmark government bonds are trading at record low yields. The U.S. 10-year Treasury bond on Thursday touched a yield of 1.97%, the lowest yield since April 1950, according to Global Financial Data.
There were also steep falls in the yields of German and British bond yields to record lows. German 10-year bund yields hit 2.09% while U.K. gilt yields were at 2.32% — their lowest since 1899.
Add in inflation, and the bonds are showing negative returns. For example, U.S. inflation data yesterday showed prices had increased by 3.6 percent in the year ended in July. So the negative real return is about 1.6 percent.
“Anyone buying the 10-year Treasury is locking in a lower standard of living,” said Jack Albin at Harris Private Bank.
Declining stock markets are really showing investors are nervous. Overnight, Asian indexes declined, ranging from 0.98% for the Shanghai Composite to as much as 6.42% for South Korea’s Kospi. Most other indexes in Japan, Hong Kong, Australia and India lost roughly between 2% and 4%.
In Europe, where fears about sovereign debt and faltering banks are scaring investors, losses in the major stock market indexes were in a similar range. The Dow Jones Industrial Average closed down 1.6% at 10,817, the S&P 500 lost 1.5% to 1,123, and the Nasdaq declined 1.7% to 2,038.
Goldman Sachs’s Abby Joseph Cohen, known for calling the bull market of the 1990s, said the fears may be overblown.
“There are some fundamental worries (for the economy,) but at the end of the day, the value of the U.S. stock market is pricing in some very ugly facts,” said said on CNBC.
The market is “pricing in some years of no earnings growth and that doesn’t seem to be a reasonable scenario. There are strong corporate balance sheets, which enable companies to do investment, share repurchases and M&A activity.”
Global investors are facing a “trinity of terror,” including government debts in Europe and the United States, renewed fears about banks –especially in Europe — and worries about global growth overall.
Yesterday, the European Central Bank revealed it provided $500 million to an unnamed bank that was struggling to raise dollars, which would be the largest such action by the ECB since October 2010.
In addition, Switzerland’s two largest banks — Credit Suisse (NYSE:CS) and UBS (NYSE:UBS) — were forced to deny rumors they tapped a Federal Reserve line of credit established through central banks for lending to other banks.
Those fearing about economic growth globally have plenty to fret about as well. Citibank (NYSE:C) and JPMorgan (NYSE:JPM) have joined Morgan Stanley (NYSE:MS) and Goldman Sachs (NYSE:GS) in cutting their forecasts on GDP growth around the world.
U.S. gross domestic product will grow 1% in the fourth quarter rather than the 2.5% previously forecast and 0.5% in the first quarter of 2012 instead of 1.5%, JPMorgan said. Citigroup cut its 2011 growth forecast by 0.1% to 1.6% lowered its projection for next year to 2.1% from 2.7%.
Real GDP growth in the U.S. has slumped to about 1 percent annualized in the first half of 2011. Yesterday, the Philly Fed survey of regional economic activity fell to -30.4, its lowest level since March 2009.
The engine of the European economy — Germany — almost stalled in the second quarter, when it rose only a seasonally adjusted 0.1 percent.
Growth is slowing in the emerging world too. GDP contracted in Singapore and Hong Kong in the second quarter and is slowing, even in the BRIC nations.
It does not help that most central banks in emerging markets are still raising interest rates to cut off inflation, much of it from increases in commodity prices, particularly food.
Finally, the fear over sovereign debt levels seems to evolving into a crisis of confidence in leadership among investors. They are coming to a realization that politicians in both Europe and the United States are either unwilling or unable to deal with their debt problems.
This may be the toughest fear of the three to overcome, and so people turn to SPDR Gold Shares ETF (NYSE:GLD).
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