ISM fuel recession causes equities to tumble
February 11, 2008
The ongoing slide of the European and US markets continue to slide even further as it was seen on Tuesday, the 5th of February. The US stock market went down again as more proof of an economic slowdown was seen from both parties of the Atlantic. However, the biggest revelation was shot by the US institute for Supply and management’s non-manufacturing business activity index that went on to fall to a mere 41.9 per cent from last year’s closing of 54.4 per cent. This was the largest ever monthly slide to have taken place and also happens to be the lowest stage since the October of 2001. It is the foremost time that the index was under the 50 mark since March 2003. The only thing that it indicates is that there is a contraction occurring. The results of various researches that were conducted were termed as disastrous.
As the slide increased in Wall Street during the after noon session, credit spreads took a sharp widening. This was to make sure that the support for the government was maintained. One thing that held to its ground was the dollar as it did not lose it value. However, gold and oil were two things that lost a lot of ground.
Due to oil losing value, the ISM was weakened very badly and this ultimately resulted in the stocks tracking a severe blow. It also resulted in the credit market performing badly today. Many are of the opinion that the organization Federal Reserve was not able to prevent the recession, because it did not take enough aggressive timely policies. While some are of the opinion that Fed rate decreasing is not the answer to get out of this tight situation. It also means that one cannot stop the slaughter of trust in the actual economy.
Many analysts warned and said that the report with which ISM came up with was not in accordance to the other indicators in January. The ISM indices have fallen this badly and rapidly only after the massive shock or incident which shook the world badly, the 9/11 mishap for example. Anyhow, the silver lining is that usually that the ISM has usually rebound back in the month that followed the month in which the prices fell sharply. Unsatisfactory services section and retail sales information in the Euro zone instigated similar delay fears and increased rumor that the ECB would be forced to alleviate its hawkish take on the interest rates.
The US credit spreads enlarged sharply as the stock markets went down. The Markit iTraxx Crossover index acts an extremely vigilant indicator of risk appetite in Europe, hyped to 504bp from 471bp. The Markit CDX index, which keeps an eye on the US investment-grade bond risk, jumped to 117bp from 109bp.
The flight out of equities provoked strong refuge for people to buy government bonds. The outcome of the 10-year US Treasury dipped to 8bp at 3.56 per cent, whereas the 2-year production stood to be 14bp lower at 1.92 per cent.