Saturday, May 27, 2006

That Sinking Feeling

Did you hear the one about the world's financial markets crashing? Somehow, I missed this last week.

Asia Times Online ::
Liquidity contraction feeds bloodbathBy Jephraim P Gundzik

A global asset market correction has begun. This correction has been inordinately brutal on what were once the world's highest-flying stock and bond markets. The sudden downdraft in global asset markets appears to have been triggered by higher-than-expected US inflation.

However, rapidly contracting global liquidity is the real culprit. The contraction of global liquidity will accelerate over the next six months, which could push currently favored markets down a further 25-35% - at least.

The bloodbath in emerging market assets since mid-May has been remarkable - very few saw it coming. In the past three
months many of the world's largest investors in emerging market assets, even some so-called market gurus, have been beating the drum for continued strong price advances.

Curiously, none of these heavyweights has emerged from their bunkers yet. Hopefully they're extremely busy trying to understand why equity markets in Korea, Thailand and the Philippines dropped by 10% and those in India and Indonesia by 15% in the past two weeks.

Seemingly unstoppable equity markets in Latin America and emerging Europe have not been immune to this setback. Stocks in Mexico and Brazil have lost an average 12% of their value, while losses in Russia and Turkey are near 20%.

Emerging market bonds have been another casualty of the global asset market downdraft, with sector-wide indices losing about 15%. This downdraft, which has also ensnared asset markets in developed countries, has wiped out hundreds of billions of dollars of investor equity.

[. . .]

There's more potential bad news, though. A sharp decline in US stocks and bonds may begin to shake foreign investors, who hold over US$6 trillion worth of these assets. Foreign capital flight from the US, which has probably already begun, could prompt the devaluation of the dollar and a prolonged period of global economic weakness. With liquidity fast tightening in the world's largest economies, emerging market assets could well be poised for their worst performance in more than a decade.


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