US and Canadian economies contract

The US economy shrank in the fourth quarter, but by less than expected. Bloomberg reports:

The U.S. economy shrank the most in the fourth quarter since 1982 as consumer spending recorded the worst slide in the postwar era, a trajectory that’s likely to continue in coming months.

The 3.8 percent annual pace of contraction was less than forecast, with a buildup of unsold goods cushioning the blow. Excluding inventories, the decline was 5.1 percent, the Commerce Department said today in Washington...

The Institute for Supply Management-Chicago said today its business barometer decreased to 33.3 from 35.1 the prior month. The index has remained below 50, the dividing line for contraction, for four months. Meanwhile, consumer confidence rose less than forecast this month, a Reuters/University of Michigan index showed. The gauge climbed to 61.2 from 60.1 in December.

A separate report today showed that employment costs in the U.S. rose at the slowest pace in almost a decade in the fourth quarter as companies limited wage gains and benefits. The Labor Department’s employment-cost index rose 0.5 percent.

GDP has also been shrinking in Canada. Bloomberg reports:

Canada’s economy contracted in November by the most since the 2003 power outage, led by slumping production in the manufacturing and construction industries.

Gross domestic product fell 0.7 percent, its second straight decline and the biggest drop since August 2003 when northeastern North America was hit by a power blackout, Statistics Canada said today in Ottawa. Economists surveyed by Bloomberg said output would fall 0.4 percent, the median of 21 estimates.

Meanwhile, weakness in the eurozone economy has helped drive down inflation but pushed up unemployment. Again from Bloomberg:

Inflation in the euro region slowed to 1.1 percent in January from 1.6 percent in the prior month, the European Union statistics office in Luxembourg said today. That was below the 1.4 percent median estimate in a Bloomberg survey of economists and was the lowest since July 1999. A separate report showed the jobless rate rose to 8 percent in December, the highest in two years, from a revised 7.9 percent in the previous month.

One bright spot for the economy recently has been improvement in the credit markets. Three-month US dollar LIBOR dropped 26 basis points in January, although it rose one basis point to 1.18 percent on Friday.

Friday also saw Reuters report positive news on UK lending.

Figures from the Bank of England showed net mortgage lending rose by 1.903 billion pounds in December 2008, the biggest increase since July of that year and more than three times analysts' forecasts for a rise of 600 million.

The number of home loan approvals rose to 31,000 in December from a record low of 27,000 the previous month and confounded forecasts for a slight decrease to 26,000.

Global economic indicators continue to deteriorate

Thursday's economic data underlined how sharply the global economy is deteriorating.

In the US, Bloomberg reports that durable goods orders and new home sales were down in December.

Orders for goods designed to last several years fell in December for a fifth month, the longest slide since comparable data began in 1992, the Commerce Department said today in Washington. Sales of new homes fell to an annual pace of 331,000, a rate that would take more than a year to clear the glut of unsold properties...

Orders for long-lasting goods dropped 2.6 percent last month, exceeding the 2 percent decrease foreseen by economists surveyed, the Commerce report showed.

For the euro area, Bloomberg reports that sentiment deteriorated again in January.

European confidence in the economic outlook fell to the lowest on record in January as the region faces its worst recession since World War II, adding to arguments for the European Central Bank to cut interest rates further.

An index of executive and consumer sentiment dropped to 68.9 from a revised 70.4 in December, the European Commission in Brussels said today. That is the lowest since the index was first published in 1985. Euro-area capacity utilization fell to 75.2 percent, the lowest since 1990, in the current quarter, the report showed.

Meanwhile, Japan faces a severe recession, one that it may have entered even earlier than the US. From Reuters:

The Japanese economy is facing a severe recession amid the global economic downturn, the head of a government panel that decides dates of business cycles said.

The panel decided on Thursday that Japan likely slipped into recession in October 2007, ending the economy's longest expansion period since World War II.

"Looking forward, I think the current economic downturn will be very severe even after we have already been in one for the last 14 months," said panel chairman Hiroshi Yoshikawa, an economics professor at Tokyo University.

Indeed, a report released on Thursday showed that retail sales fell 2.7 percent in December. Today, another report showed that the Nomura/JMMA Japan Purchasing Managers Index fell to 29.6 in January from 30.8 in December.

Other reports today amplified the case that Japan is in deep recession. From Bloomberg:

Japan headed for its worst postwar recession in December as factory output slumped an unprecedented 9.6 percent, unemployment surged and households cut spending.

The drop in production eclipsed the previous record of 8.5 percent set only a month earlier, the Trade Ministry said today in Tokyo. The jobless rate soared to 4.4 percent from 3.9 percent, the biggest jump in 41 years...

Household spending slid 4.6 percent, a 10th month of declines, a separate report showed. Consumer prices excluding fresh food rose 0.2 percent in December from a year earlier, slowing from 1 percent in November.

Stocks jump as Fed holds

Stocks are having a good run at the moment. Bloomberg reports Wednesday's market action.

U.S. stocks rose, extending a global rally, as President Barack Obama prepared to set up a so-called bad bank to absorb toxic investments and Yahoo! Inc. and Germany’s SAP AG reported better-than-estimated earnings...

The S&P 500 added 3.4 percent to 874.09, with financial companies posting 19 of the top 20 gains. The Dow Jones Industrial Average climbed 200.72 points, or 2.5 percent, to 8,375.45. Europe’s benchmark, the Dow Jones Stoxx 600 Index, rose 3.2 percent and the MSCI Asia Pacific Index gained 0.5 percent.

This time, the Fed contributed little to the rally.

Benchmark indexes climbed to their highs after the Federal Reserve left its benchmark interest rate as low as zero and said it may keep it at “exceptionally low levels” for some time...

Treasuries fell, led by the biggest decline in 30-year bonds in three weeks, after the central bank failed to expand on its plan to buy government debt as a means to reducing borrowing costs. The dollar gained against the yen and euro as the Fed resolved to do whatever is needed to revive the economy.

In contrast to the Fed, the Reserve Bank of New Zealand has a lot more leeway to cut rates. Or at least it had. From the National Business Review today:

The Reserve Bank of New Zealand has cut the Official Cash Rate (OCR) from 5 percent to 3.5 percent.

Reserve Bank Governor Alan Bollard this morning announced the reduction, to its lowest ever level, since it was introduced at 4.5 percent in 1999.

There may be more rate cuts to come from central banks around the world, although, as Reuters reports, the latest economic indicators are not all deteriorating.

The IMF released revised forecasts on Wednesday, slashing its projection for 2009 global growth to just 0.5 percent -- the weakest since World War II -- from a November estimate of 2.2 percent. It warned that deflation risks were rising and that toxic assets -- high-risk debt accumulated in the global credit boom that went bust 17 months ago -- needed to be removed from the banking system.

Earlier IMF chief Dominique Strauss-Kahn said the fund would struggle if it had to meet all potential claims on its resources and that the stability of the euro zone could be in danger if its governments did not coordinate more closely...

The United Nations agency, the International Labour Organisation, said that if the global recession deepened in 2009 another 51 million jobs worldwide could be lost this year in a worst-case scenario.

The struggle to raise business funding has helped drive confidence among leaders of the world's top companies to a new low, according to a poll of more than 1,100 CEOs that set a grim backdrop for the annual meeting of the world's business and political elite in the Swiss ski resort of Davos.

Yet in France, a survey showed consumer confidence rose in January to its strongest since April last year, although it remained heavily negative and a separate report showed industrial companies expected demand for goods to continue to fall in the first quarter.

In Germany, market research group GfK's forward-looking sentiment gauge, based on a survey of 2,000 Germans, showed morale should hold steady in February. That beat expectations ECONDE and suggested that a collapse in global commodity prices since the world economy tipped into a steep downturn may be easing at least one of the pressures on consumers...

The Conference Board's Leading Economic Index for the euro zone fell 0.9 percent in December to 93.3 points after declines in November and October, the research group said.

The index "indicates that there is no improvement in sight", said Jean-Claude Manini, the Conference Board's senior economist for Europe after the index's first release for the euro zone.

And in Italy, business sentiment fell in January for the eighth month running to its lowest on record.

German business confidence up, US consumer confidence down

German business confidence unexpectedly rose in December. Bloomberg reports:

The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, increased to 83 from 82.7 in December. Economists expected a drop to 81, the median of 37 forecasts in a Bloomberg News survey shows.

The same can't be said of US consumer confidence. Again from Bloomberg:

Consumer confidence in the U.S. sank to the lowest level on record in January as jobs evaporated and home values sank, signaling a further slide in spending at the start of 2009.

The Conference Board’s index, records for which go back to 1967, fell to 37.7, lower than forecast. A separate report showed the drop in house prices in major metropolitan areas deepened in November. The S&P/Case-Shiller 20-city index fell 18.2 percent from a year earlier, the most since it began in 2001.

US stocks managed to finish the day up though.

Stocks rose as better-than-forecast earnings from companies including Texas Instruments Inc. and Travelers Cos. overshadowed the grim economic news. The Standard & Poor’s 500 Index climbed 1.1 percent to close at 845.71. Treasuries moved higher, sending benchmark 10-year note yields to 2.53 percent at 4:17 p.m. in New York from 2.64 percent late yesterday.

US economic indicators turn up

There were positive surprises for US economic data on Monday. From Bloomberg:

Two measures of U.S. economic performance unexpectedly turned positive in December...

The National Association of Realtors said sales of existing homes rose 6.5 percent to an annual rate of 4.74 million last month, propelled by the biggest slump in prices since the Great Depression. The Conference Board’s index of leading economic indicators increased 0.3 percent as the supply of money expanded.

Unfortunately, job losses are also going up.

Analysts said the indicators, while reflecting Federal Reserve and Treasury efforts to stave off a complete collapse of the economy, needed to be viewed against the backdrop of surging firings -- at least 74,000 announced today alone. The job losses, they said, may deepen the pullback in consumer spending and make banks more reluctant to lend, exacerbating what’s already the longest recession since 1982.

For the Lion City, the Ox is no bull

According to the Chinese zodiac, today marks the first day of the Year of the Ox. Many investors must no doubt be hoping that the Ox brings bullish prospects for markets in the new year.

Last year, the Year of the Rat, certainly did not prove bullish for markets. Almost all asset prices declined substantially, government securities, especially United States Treasuries, being among the few exceptions. Major economies experienced slumps, including notably the US, the euro area and Japan.

Today, the Rat makes way for the Ox. With the Rat gone, is it time for investors to nibble on stocks?

According to feng shui master Raymond Lo, 2009 will be a year in which the stock market stabilises. He says that this Year of the Ox is symbolized by two elements: earth sitting on top of earth. This suggests to him harmony and peace. Therefore, he expects to see signs of more stability and calmness in the stock market. However, in the absence of a fire element, usually seen by feng shui experts as the driving force behind stock market movements, investors will remain cautious.

Historically, Ox years have seen some pretty turbulent times, especially in recent decades, but they have not generally been bad for stock markets.

In 1973, we saw the first oil crisis and stock markets tumbling around the world. In the US, the Standard & Poor's 500 fell 17.4 percent while the Nikkei 225 fell 17.3 percent.

1985, however, turned out much better. The S&P 500 rose 26.3 percent that year while the Nikkei 225 was up 13.6 percent.

In 1997, the last Ox year, we had financial crises in Asia and other emerging economies. The Nikkei 225 did not escape the fallout, declining 21.2 percent. The US market, however, was unscathed, the S&P 500 actually surging 31.0 percent that year.

While the Ox has not generally been unfriendly for the larger markets, there is one stock market which has invariably been gored by it: Singapore's.

In 1973, the Morgan Stanley Capital International (MSCI) Singapore Index fell 42.7 percent. In 1985, it fell 26.9 percent as the economy experienced its first recession since the country gained independence. In 1997, it fell 29.2 percent.

Last year, the MSCI Singapore fell 49.5 percent, the biggest decline on record. Will it fall again this year?

Since the beginning of 2009, the MSCI Singapore has fallen five percent. It is early in the year, though, and historically, two consecutive years of declines in the index have not been common.

Having said that, the plunge in 1973 was followed by a 51.3-percent fall in 1974, the decline in 1985 had been preceded by a 26.6-percent fall in 1984 and the tumble in 1997 had been preceded by a 1.8-percent fall in 1996 and was followed by a 7.3-percent fall in 1998.

In other words, years around the Ox year have always seen a multi-year bear market for Singapore stocks.

Will this time be different? If the latest economic figures from the Singapore government are any indication, probably not.

The Singapore economy fell into recession in 2008 after the economy contracted 5.5 percent in the second quarter and 5.1 percent in the third quarter on a seasonally-adjusted, annualised quarter-on-quarter basis.

A report from the Ministry of Trade and Industry on 21 January said that gross domestic product fell again in the fourth quarter, this time by 3.7 from the previous year or 16.9 percent on an annualised quarter-on-quarter basis. Furthermore, the report said that the economic downturn is expected to continue in 2009, with the ministry's growth forecast for the year being revised down to a range of -5.0 to -2.0 percent from -2.0 to +1.0 percent announced on 2 January 2009.

"The Singapore economy is going through its sharpest, deepest and most protracted recession," the ministry's second permanent secretary Ravi Menon said at a media briefing on 21 January.

That view on the economy was echoed the next day by Finance Minister Tharman Shanmugaratnam when he proposed a government budget for 2009 that included a S$20.5 billion package of measures to mitigate the impact of the downturn. "We are likely to experience the deepest recession in the Singapore economy since our independence, arising from the worst global economic decline in 60 years," he told Parliament.

With that kind of forecast from the government, investors in the Singapore stock market will be fortunate if the market avoids another sharp plunge this year. More realistically, investors should probably expect more turmoil for the stock market.

The Ox may have arrived today. The bull is likely to be much tardier.

Europe in recession

Britain officially joins the recession club. Reuters reports:

The Office for National Statistics said the economy shrank by 1.5 percent in the fourth quarter of last year, the biggest drop since 1980. That followed a 0.6 percent decline in the third quarter, fulfilling the technical definition of recession.

Meanwhile, the euro area appears to have remained in recession this month. From Bloomberg:

Europe’s manufacturing and service industries contracted for an eighth month in January as the global recession curbed demand for exports and damped spending.

A composite index of both industries was at 38.5 compared with 38.2 in December, which was the lowest reading since the survey began in 1998. Economists forecast a decline to 37.4, according to the median of 15 estimates in a Bloomberg survey. The index is based on a survey of purchasing managers by Markit Economics and a reading below 50 indicates contraction...

A gauge of manufacturing activity was at 34.5 after reaching a record low of 33.9 in December. The services index rose to 42.5 from 42.1.

US housing weakens, Canadian leading indicators decline, European industrial orders fall

The economic reports are all coming in negative now.

There is no recovery in the US housing market in sight. From MarketWatch:

Closing out the third year of the housing bust, construction on new homes took another turn for the worse in December, falling more than 15% to a seasonally adjusted annual rate of 550,000, the lowest on record, the Commerce Department reported Thursday.

Permits to build single-family homes also fell, dropping 12.3% to 363,000 last month, while total permits including apartments dropped 10.7% to a 549,000 annual rate. The figures represented record lows for both single-family and total permits...

The mood of home builders' has rarely been worse. The National Association of Home Builders reported Wednesday that its sentiment index fell to a record-low 8 in January. See full story.

Meanwhile, the US employment situation continues to deteriorate.

In a separate report Thursday, the Labor Department said first-time filings for unemployment benefits rose by 62,000 last week to 589,000. The number of new claims and continuing claims were at the highest levels since 1982. See full story.

There was also gloomy economic news north of the border. On Thursday, Statistics Canada reported that Canadian retail sales fell 2.4 percent in November while the composite index of leading indicators fell 0.6 percent in November.

And across the Atlantic, the outlook is looking gloomy too. From Bloomberg:

Industrial orders in the euro zone declined 26 percent from the year-earlier month, the European Union statistics office in Luxembourg said today. That was the biggest drop since the euro was introduced a decade ago and exceeded economists’ median estimate for a drop of 20 percent in a Bloomberg News survey. Excluding transport, orders fell 23 percent...

From the prior month, orders fell 4.5 percent in November, less than the 5 percent drop forecast by economists.

And across the English Channel as well. From Reuters:

The Confederation of British Industry's monthly industrial trends...survey's factory orders balance tumbled to -48 in January from December's -35, the lowest since July 1992...

The balance measuring companies' expectations for output over the next three months fell to -43 from -42, the weakest since September 1980.

Asian slump

The news from Asia today is pretty gloomy.

AFP/CNA reports the latest BoJ forecasts.

Japan's economy faces a two-year recession, the central bank warned Thursday as it unveiled new measures to repair battered credit markets by mopping up risky assets.

The world's second biggest economy is expected to contract by 1.8 per cent in the current financial year to March and by 2.0 per cent the following year, the Bank of Japan said, downgrading its earlier outlook.

The Bank left its key interest rate unchanged at 0.1 per cent, as expected, while announcing fresh steps aimed at unblocking credit flows.

The BoJ said it would spend up to three trillion yen (US$33.7 billion) to buy commercial paper, a type of short-term corporate debt, to make it easier for companies to secure vital credit during the recession.

Earlier, Japan had reported that exports plunged in December.

Japan reported Thursday a record 35 per cent plunge in exports in December as consumers worldwide tightened their belts, pushing Asia's biggest economy even deeper into recession.

Demand for Japanese goods plummeted, prompting warnings from analysts that the economy may have contracted 10 per cent on an annualised basis in the fourth quarter of 2008 - the worst performance in three decades.

Japan's neighbours look to be in bad shape too.

China's economy slowed sharply in the final quarter of 2008 to just 6.8 per cent as thousands of factories that sold to overseas markets shut, pulling the full-year growth figure down to 9.0 per cent, official data showed.

South Korea said its economy was in the worst shape since the East Asian financial crisis a decade ago, following a 5.6-per-cent contraction quarter-on-quarter in the final three months of last year...

Singapore reported on Wednesday it was facing its worst-ever recession after the economy contracted by 16.9 per cent in the final quarter, its biggest fall on record.

Stocks, sterling fall as BoC, BoE contemplate ZIRP

Investors didn't give the new US president much of a welcome on Tuesday. From Bloomberg:

U.S. stocks sank, sending the Dow Jones Industrial Average to its worst Inauguration Day decline, as speculation banks must raise more capital sent financial shares to an almost 14-year low.

State Street Corp., the largest money manager for institutions, tumbled 59 percent after unrealized bond losses almost doubled. Wells Fargo & Co. and Bank of America Corp. slumped more than 23 percent on an analyst’s prediction that they’ll need to take steps to shore up their balance sheets. The Dow’s 4 percent slide was the most on an Inauguration Day in the measure’s 112-year history, according to data compiled by Bloomberg and the Stock Trader’s Almanac...

The S&P 500 plunged 5.3 percent to 805.22. The S&P 500 Financials Index fell 17 percent to below its lowest closing level since March 1995 as concern European banks need more capital also weighed on the group. The Dow average slid 332.13 points to 7,949.09. Both the Dow and S&P 500 retreated to two- month lows.

Stock markets in Europe and Asia fell too.

Europe’s Dow Jones Stoxx 600 Index retreated 2.1 percent today, led by banks and technology companies... The MSCI Asia Pacific Index retreated 2.1 percent today.

ZIRP doesn't seem to have done much good for the US so far but Canada looks like it is going to try it out soon anyway. From Bloomberg:

The Bank of Canada slashed its key interest rate to the lowest since the institution was founded in 1934 and signaled that more cuts may be needed to jolt the economy out of recession and stabilize credit markets.

Governor Mark Carney cut the target rate on overnight loans between commercial banks by half a point to 1 percent, lower than the previous record of 1.12 percent in 1958 when the rate was based on treasury-bill yields. The move was anticipated by 19 of 20 economists surveyed by Bloomberg News.

The UK is a bit further behind as far as ZIRP is concerned, but that hasn't stop the BoE from talking about going beyond lowering interest rates. From Reuters:

The economy will likely shrink markedly in the first half of 2009 and policymakers need to think about using more than just interest rates to stimulate demand, Bank of England Governor Mervyn King said on Tuesday...

"With Bank Rate already at its lowest level in the Bank's history, it is sensible for the Monetary Policy Committee to prepare for the possibility -- and I stress we are not there yet -- that it may need to move beyond the conventional instrument of Bank Rate and consider a range of unconventional measures."

All this talk of monetary easing means that sterling has gotten a pounding. From Bloomberg:

The dollar advanced to $1.2873 per euro from $1.2904 late in New York yesterday. It reached $1.2845, the strongest since Dec. 9. Sterling weakened to $1.3871 from $1.3928. It touched $1.3811, the lowest since June 2001. Against the euro, the pound slid to 92.79 pence from 92.62 pence yesterday when it reached 93.25 pence, the lowest since Jan. 5.

European economy to shrink in 2009

There was more evidence on Monday that the European economy continued to deteriorate in the fourth quarter. From Eurostat:

In the construction sector, seasonally adjusted production decreased by 1.1% in the euro area (EA15) and by 1.6% in the EU27 in November 2008, compared with the previous month. In October, production fell by 0.1% in the euro area, but increased by 0.5% in the EU27.
Compared with November 2007, output in November 2008 dropped by 4.7% in the euro area and by 4.2% in the EU27.

The European economy is expected to continue shrinking this year. Bloomberg reports the latest forecast from the European Commission.

The euro-area economy will contract this year for the first time since the currency was introduced a decade ago, the European Commission forecast, cutting its outlook for the region amid the worst financial crisis since World War II.

The economy of the 16 countries sharing the euro will shrink 1.9 percent in 2009, the Brussels-based commission said today, revising a November estimate for growth of 0.1 percent. European Central Bank President Jean-Claude Trichet today said economic prospects are “substantially” worse than the ECB predicted just last month...

In Europe, the slump deepened in the fourth quarter, according to the commission, which estimates that gross domestic product shrank by 1.5 percent in the final three months of the year after a 0.2 percent contraction in the previous two quarters. The economy will continue to contract in the first two quarters of this year, it said...

The euro region will return to growth next year with an expansion of 0.4 percent, today’s forecasts show. This year, Ireland will contract 5 percent, Germany 2.3 percent and economic output in Spain will drop 2 percent. The economy of the 27 countries in the EU will shrink 1.8 percent this year, according to the commission forecasts.

Meanwhile, the UK government has been forced to come to the rescue of banks again. Reuters reports:

The government threw its troubled banks a second multi-billion pound lifeline in three months on Monday and gave its central bank the green light to pump cash into the ailing economy because interest rates are already close to zero.

The latest plan will see the government increase its stake in Royal Bank of Scotland after the bank announced the biggest loss in British corporate history: up to 28 billion pounds in 2008.

But a lack of detail in the package and fears it is one step from full nationalisation sent shares skidding: RBS crashed 70 percent to 10.5 pence, its lowest level for over 25 years, and shares in other banks all slumped heavily.

Japanese economy still deteriorating

There appears to be no imminent end to the recession in Japan. In fact, the latest data show that it may be getting worse.

On 16 January, the Bank of Japan released its Regional Economic Report for January. The report described economic conditions in the country as "deteriorating" with all nine regions having revised their assessments of economic conditions downward compared to their assessments in October 2008.

Today's economic release from the Ministry of Economy, Trade and Industry corroborated the downbeat assessments. The report showed that industrial production fell 8.5 percent in November, worse than the preliminary estimate of an 8.1 percent decline.

Economic data released last week showed the same deteriorating trend.

The Ministry of Finance's balance of payment report on 13 January showed that exports fell 26.5 percent in November from a year earlier while imports fell 13.7 percent. That left the trade balance with a deficit of 93.4 billion yen, a complete reversal of the surplus of previous years. The current account balance remained in surplus but shrank 65.9 percent from a year earlier.

Also on 13 January, the Cabinet Office's survey of workers in economically-sensitive jobs showed a deterioration in sentiment in December. The diffusion index for current conditions from the Economy Watchers Survey fell from 21.0 in November to 15.7 in December. The diffusion index for future conditions fell from 24.7 to 17.6.

Then on 15 January, another Cabinet Office report showed that investment spending in Japan is declining further. Core private sector machinery orders fell 16.2 percent in November, the biggest fall since the current survey began in 1987.

Japan's economy may have largely avoided the financial excesses seen in the West but as an export-dependent economy in a globalised world, it is not avoiding the fallout from the financial turmoil.

US consumer prices, industrial production fall in December

The latest US economic data show that the recession very likely hasn't ended. Bloomberg reports:

Consumer prices and industrial production tumbled in the U.S. as a record slide in retail sales destroyed companies’ pricing power and idled more than a quarter of factory capacity.

The cost of living fell 0.7 percent in December, capping the smallest annual increase since 1954, the Labor Department said today in Washington. Industrial output shrank 2 percent, and the capacity-utilization rate slid to 73.6 percent, the Federal Reserve said...

The Reuters/University of Michigan preliminary index of consumer sentiment rose to 61.9 from 60.1 in December.

Based on the industrial production data, Spencer at Angry Bear says that the recession in the US is likely to be severe.

From a level of 100 at the peak industrial production has now fallen to 92.0, or roughly at the average trough level for the 10 post WW II recessions of 92.3%... [T]here is little doubt that by the time this recession is over it will have been among the worse post WW II recessions. If you rely on nothing else, the current level of inventories very strongly implies that manufacturing output has yet to bottom.

Corporate profits are headed for record declines as well.

[T]he spread between falling prices as measured by the PPI and unit labor cost implies that corporate and/or S&P 500 profit margins are now falling at post WW II record rates. Together with sharply falling output and write-offs in the financial sector it clearly looks like the drop in corporate profits and/or S&P 500 earnings will set a post WW II record decline this cycle.

Indeed, Paul Krugman thinks that the US faces a real risk of deflation.

... These days I’m looking at the TIPS spread: the difference between nominal US bond rates and rates on Treasury Inflation-Protected Securities. This spread is an indicator of expected inflation. And what it shows isn’t good...

More and more, this looks like a Japan-type trap.

Still, maybe there is light at the end of the tunnel. From Reuters:

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index fell in the week ending Jan 9 to 108.6 from 109.3 in the previous week, initially reported as 109.4.

The index's annualized growth rate ticked up to negative 25.5 percent from negative 26.9 percent, revised from minus 26.8 percent. It marked its highest reading since the week to Oct. 24, 2008, when it was minus 22.8 percent.

ECB cuts rates as global recession looks more likely

The ECB cut interest rates on Thursday pretty much as economists expected. Bloomberg reports:

The European Central Bank cut its benchmark interest rate by half a percentage point to 2 percent, matching a record low, as the deepening recession pressed policy makers into action.

Inflation has peaked and is expected to continue falling this year.

The rate declined to 1.6 percent in December.

The ECB last month forecast inflation would average 1.4 percent this year and 1.8 percent in 2010. It predicted the economy would contract 0.5 percent in 2009 before rebounding to expand 1 percent in 2010.

This means there will probably be more rate cuts.

Investors expect the ECB to lower the benchmark rate to as low as 1.25 percent by June, Eonia forward contracts showed before today’s decision.

Elsewhere, there is plenty of evidence that the global economy is in a slump.

Bloomberg reports Thursday's US economic reports.

Initial jobless claims jumped to 524,000 in the week ended Jan. 10, the Labor Department said today in Washington. Producer prices fell 1.9 percent, capping the first annual drop since 2001. Separately, the Federal Reserve said manufacturing in the Philadelphia and New York regions shrank further in January.

Earlier, the reports from Japan showed a similar pattern. From Bloomberg:

Japanese machinery orders fell by a record 16.2 percent in November, twice as much as economists estimated, as businesses cut spending amid a deepening global recession...

Weak domestic demand and falling oil prices may herald a return to the deflation that plagued Japan for almost a decade until 2005. Producer prices rose 1.1 percent in December, the slowest pace since May 2004, a central bank report today showed. Wages tumbled 1.9 percent in November and consumers have pared spending for nine consecutive months.

And the impact of the global economic downturn is hitting China as well. Again from Bloomberg:

Foreign direct investment in China declined for a third month, adding to the toll that recessions in the U.S. and Europe are taking on the world’s third-biggest economy.

Investment fell 5.7 percent to $5.98 billion in December from a year earlier, the commerce ministry said at a briefing in Beijing today. November’s decline was 36.5 percent...

China’s economy overtook Germany’s in 2007 to become the world’s third largest, according to revised figures released yesterday by China’s statistics bureau...

So a global recession is increasingly likely. At least that's what the UN seems to think. From Reuters:

Countries around the world must boost demand with massive coordinated packages to tackle an economic outlook of unrelieved gloom, the United Nations said on Thursday.

Launching its 2009 World Economic Situation and Prospects, the U.N. said the global economy was deteriorating so fast that the report's baseline assumptions were already out of date, and the pessimistic scenario was now more realistic...

The U.N. report forecasts 1.0 percent global economic growth this year, with small recessions in developed nations offset by strong growth in developing countries including China and India.

But a pessimistic scenario projects steeper contractions in rich countries and smaller growth in emerging and developing nations, giving an overall 0.4 percent decline in world output.

[Heiner Flassbeck, director of globalisation and development strategies at UNCTAD] said this scenario was now more likely. "For the world as a whole the outcome could be zero or even slightly below zero. This is not an overly pessimistic view," he said.

US retail sales, eurozone industrial production fall

Wednesday brought yet more gloomy economic data.

Bloomberg reports that US consumers are cutting back on spending.

Sales at U.S. retailers fell more than twice as much as forecast in December as job losses and the lack of credit led Americans to cut back on everything from car purchases to eating out.

The 2.7 percent slump marked the sixth straight month of declines, the longest string since comparable records began in 1992, the Commerce Department said today in Washington... Excluding gas, retail sales fell 1.4 percent.

Meanwhile, businesses are cutting inventories.

Commerce also reported that inventories at all businesses in November dropped 0.7 percent, more than economists estimated and the third straight decrease. A 1.7 percent decline in stockpiles at retailers, as furniture stores and auto dealers cut back, paced the overall slump.

The weakening economic activity was picked up in a Fed report.

The decline in purchases and lack of credit caused a further weakening in the economy across almost all areas of the country in the past month, the Federal Reserve said today in its regional business survey. Retailers engaged in “deep discounting” during the holidays, with “sizable” price cuts, while wage pressures were “largely contained,” the Fed report found.

The weaker economy is also being reflected in import prices.

Labor Department figures showed the import-price index decreased 4.2 percent, less than economists forecast, after a revised 7 percent drop in November. Prices from a year earlier were down 9.3 percent, the largest year-over-year decline since the index was first published in 1982. Prices excluding fuels dropped 1.1 percent last month.

And it's not just the US economy that's weakening. The euro economy continues to report weak data. From Reuters:

Industrial output in the 15 countries using the euro in November fell 1.6 percent on the month and 7.7 percent year-on-year, the European Union statistics office said on Wednesday.

US and UK exports fall in November

Global trade is clearly suffering. Following the declines seen in the Asian economies earlier on Tuesday, US and UK trade numbers reported later that day also showed large falls in exports.

Bloomberg reports the US numbers.

The U.S. trade deficit narrowed in November by the most in 12 years as tumbling oil prices and slumping consumer spending cut imports.

The gap shrank 29 percent, more than forecast, to $40.4 billion, the Commerce Department said today in Washington. A record 12 percent drop in imports propelled the improvement. Exports fell for a fourth straight month...

Total U.S. exports dropped 5.8 percent to $142.8 billion, today’s report showed. Foreign purchases of automobiles were the lowest since October 2006.

In the UK, there wasn't even the consolation of a fall in the trade deficit. BBC reports:

The UK's goods trade gap with the rest of the world reached record levels in November, official figures show.

The deficit stood at £8.33bn, the Office for National Statistics said, up from October's figure, which was revised downwards to £7.631bn...

Total exports dropped by 6% in November, with imports down 2% for the month.

OECD leading indicators signal deep slowdown, Chinese and Japanese exports shrink

The latest OECD composite leading indicators show that developed economies face deep slowdowns.

The CLI for the OECD area decreased by 1.3 point in November 2008 and was 7.3 points lower than in November 2007. The CLI for the United States fell by 1.7 point in November and was 8.7 points lower than a year ago. The Euro area’s CLI decreased by 1.1 point in November and stood 7.6 points lower than a year ago. In November, the CLI for Japan decreased by 1.6 point, and was 5.5 points lower than a year ago.

Emerging economies will not escape the slowdown.

The CLI for China decreased 3.1 points in November 2008 and was 12.9 points lower than a year ago. The CLI for India fell by 1.2 point in November 2008 and was 7.6 points lower than in November 2007. The CLI for Russia decreased by 4.3 points in November and was 13.8 points lower than a year ago. In November 2008 the CLI for Brazil decreased by 1.1 point and was 2.9 points lower than a year ago.

Indeed, the latest Chinese trade data released today show the developing trend clearly. From AFP/CNA:

Chinese exports extended their decline into a second month in December as the global crisis continued to impact its heavily trade-dependent economy, state media reported Tuesday...

Exports from the world's fourth-largest economy dropped 2.8 per cent in December from a year earlier to 111.2 billion US dollars, the paper said...

Imports in December were down by an even steeper 21.3 per cent to 72.2 billion US dollars, the paper said, suggesting a rapid contraction in domestic economic activity.

Japan also reported today a fall in exports. From Bloomberg:

Japan’s current-account surplus narrowed for a ninth month in November as exports slumped by a record in the wake of the global recession...

Exports fell 26.5 percent in November from a year earlier, the most since comparable data were first made available in 1985, today’s report showed. Imports slid 13.7 percent.

End of 2008 shows no end of recession

The new year is less than two weeks old but it is already clear that the global economy continued to contract near the end of the preceding year.

The United States economy entered a recession in December 2007 and, if the employment situation is any indication, it does not look like it is recovering yet.

On 9 January, the Labor Department reported that non-farm payroll employment fell by 524,000 in December based on the establishment survey. This means that the total number of jobs lost in 2008 is now estimated at 2.59 million, just a little less than the 2.75 million at the end of World War 2, with 1.9 million jobs lost in just the past four months.

The report also showed that the unemployment rate rose from 6.8 percent in November to 7.2 percent in December, the highest level in almost 16 years, based on data from the household survey. This survey showed employment falling 806,000 last month.

Other indicators corroborate the continuing weakness in the US economy.

On 2 January, the Institute for Supply Management reported that its PMI, a gauge of manufacturing activity in the US, fell from 36.2 in November to 32.4 in December, the lowest level since 1980. Services held up better, as another ISM report on 6 January showed that the non-manufacturing index rose from 37.3 in November to 40.6 in December, a number, though, that still indicates a decline in activity.

The latest data from the Economic Cycle Research Institute also showed that an economic recovery is not imminent. Although the ECRI's weekly leading index rose to 109.4 in the week ending 2 January from 108 in the previous week and its annualised growth rate rose to minus 26.8 from minus 28.7 percent, the latter remained deep in negative territory.

The economy in the euro area is also weak. On 8 January, Eurostat confirmed that gross domestic product in the euro area fell by 0.2 percent in the third quarter, thus also confirming that the economy is in recession after previously reporting that it had also shrunk by 0.2 percent in the second quarter.

As a result, unemployment in the euro area has begun to rise. The unemployment rate rose to 7.8 percent in November from 7.7 percent in October, according to another report from Eurostat.

The European Commission's business and consumer survey showed that the weakness persisted into the end of 2008. The economic sentiment indicator from the survey for the euro area fell sharply to 67.1 in December from 74.9 in November.

Surveys by Markit Economics showed a similar picture. The eurozone purchasing managers' index for manufacturing fell from 35.6 in November to 33.9 in December, the lowest since the survey was introduced in 1998. The services index declined from 42.5 to 42.1.

It was the same story in Japan.

The Nomura/JMMA Japan purchasing managers index of manufacturing activity fell from 36.7 in November to 30.8 in December, the lowest since the survey began in 2001.

Other data corroborated the negative trend in Japanese manufacturing in the fourth quarter of 2008. Industrial production fell 8.1 percent in November after having fallen 3.1 percent in October.

With Japan's industrial output falling, so almost certainly did its GDP. Data released by the Cabinet Office on 9 January showed that the composite coincidence index fell from 97.7 in October to 94.9 in November. The composite leading index fell from 85.2 to 81.5.

So the US, eurozone and Japanese economies all look as though they contracted in the fourth quarter of 2008 and showed no sign of imminent recovery. It is certainly looking like the global economy will start 2009 on a negative note.

US loses half a million jobs, European industrial output falls

Friday brought more bad news for the US economy. From Bloomberg:

The U.S. lost more jobs in 2008 than in any year since 1945 as employers fired another 524,000 people in December, indicating a free-fall in the economy just days before President-elect Barack Obama takes office...

The Labor Department reported that the nation lost 2.589 million jobs in 2008, just shy of the 2.75 million decline at the end of World War II. The unemployment rate climbed more than economists forecast, to 7.2 percent in December, the highest level in almost 16 years.

The employment situation in Canada has also been deteriorating. Bloomberg reports:

Canada’s jobless rate rose to the highest in almost three years last month and employment fell by almost twice as much as economists expected as the country suffered from the global recession.

The jobless rate rose to 6.6 percent in December from 6.3 percent, Statistics Canada said today in Ottawa. Employers cut a net 34,400 workers after a drop of 70,600 in November...

Separately today, Statistics Canada said building permits fell 12 percent in November to the lowest since February 2007, while Canada Mortgage and Housing Corp. said housing starts fell 0.4 percent last month to the lowest since 2001.

The reports from Europe on Friday were not much better. Although eurozone retail sales rose 0.6 percent in November, they were still down 1.5 percent from the previous year.

And European industrial output is falling across the continent. From Bloomberg:

Industrial production plunged throughout Europe in November as the global recession deepened, adding pressure on the European Central Bank to cut interest rates.

Industrial output in Germany, the euro area’s largest economy, fell a seasonally adjusted 3.1 percent from October, extending the worst decline since data for a reunified Germany was first compiled in 1991, the Economy Ministry in Berlin said today. In France, production tumbled 2.4 percent in November, the fourth monthly decline, the statistics office in Paris said...

Industrial production in November also declined in Spain, Greece, Slovenia and the euro area’s newest member, Slovakia...

And the same goes for the UK, reports Reuters:

The Office for National Statistics said on Friday manufacturing output was 7.4 percent lower than a year earlier, its biggest fall since June 1981 when Britain was in the throes of an industrial meltdown that decimated its car industry and coal mines.

Production was down 2.9 percent in November alone, the biggest monthly fall since one-off plant closures for the Queen's jubilee in the summer of 2002, and more than four times the drop forecast by economists polled by Reuters...

The broader industrial output measure, which includes North Sea oil production and power generation as well as factory output, dropped 2.3 percent on the month for a 6.9 percent annual fall. That annual rate was the weakest since March 1981.

Rate cuts continue

This time with the Bank of England cutting rates by half a percentage point on Thursday to a record low of 1.5 percent and the Bank of Korea cutting by a similar amount today to bring its seven-day repurchase rate to 2.5 percent, also a record low.

European data released on Thursday were pretty dreadful. From Bloomberg:

European confidence in the economic outlook fell to the lowest on record and unemployment rose to a two-year high, adding to pressure on the European Central Bank for more interest-rate cuts.

An index of executive and consumer sentiment dropped to 67.1 in December from 74.9 in the prior month, the European Commission in Brussels said today. That is the lowest since the index started in 1985. Separate data showed euro-area unemployment rose to 7.8 percent in November from 7.7 percent a month earlier...

... Euro-area GDP shrank 0.2 percent in the third quarter from the prior three months, which saw a similar contraction, the EU’s statistics office said in a separate report today...

Exports from Germany, Europe’s largest economy, plunged 10.6 percent in November, the biggest drop since records for a reunified Germany began in 1990, the Federal Statistics Office said today, and manufacturing orders fell for a third month...

More US job losses, investors pull back

US job losses appear to be rising. From Bloomberg:

Companies in the U.S. eliminated an estimated 693,000 jobs in December, the most since records began in 2001, a private report based on payroll data showed.

The drop in the ADP Employer Services gauge was larger than the median estimate of economists surveyed by Bloomberg News. Today’s report is the first to reflect methodological changes that ADP says will narrow the differences between its calculations and the government’s payroll numbers.

The ADP report, together with poor reports from companies, finally ended the strong run in stocks, the S&P 500 falling 3 percent on Wednesday.

Crude oil also fell sharply, not helped by a bigger-than-expected inventory last week reported by the Energy Department.

With the global economy sinking, policy makers are in rescue mode. Taiwan and Indonesia cut interest rates on Wednesday.

But while monetary policy has been pushing rates down, fiscal policy is making investors think twice about buying government securities. Bloomberg reports Wednesday's action in Treasury markets.

Treasuries fell as a record $30 billion auction of three-year notes added to concern debt sales will swell to unprecedented levels amid efforts by the U.S. to spur economic growth with spending increases and tax cuts.

Government debt has dropped 1.35 percent since December, the worst start of a year in at least two decades, according to Merrill Lynch & Co.’s U.S. Treasury Master Index. The U.S. budget deficit will more than double this year to $1.2 trillion, a Congressional Budget Office report said...

Yields on benchmark 10-year notes rose three basis points, or 0.03 percentage point, to 2.49 percent at 4:45 p.m. in New York, according to BGCantor Market Data. The 3.75 percent security maturing in November 2018 fell 10/32, or $3.13 per $1,000 face amount, to 110 30/32. The yield has climbed 46 basis points since hitting a record low of 2.035 percent on Dec. 18.

Two-year note yields increased three basis points to 0.81 percent. Thirty-year bond yields added three basis points to 3.04 percent.

The same concerns apply in Europe, where Germany’s sale of 10-year bunds on Wednesday lured the least demand in six months and the yield on the 10-year bund rose four basis points to 3.19 percent even as German unemployment rose for the first time in almost three years in December and eurozone producer prices fell the most in 27 years in November.

Economic data weak but stocks continue to climb

Although the ISM's non-manufacturing report turned out better than expected, yesterday's economic data on the whole pointed to a very weak US economy. Bloomberg reports:

The Institute for Supply Management’s index of non- manufacturing businesses was 40.6 for December, a higher-than- forecast reading that was still the second-worst on record. The National Association of Realtors index of pending home resales fell 4 percent in November, and the Commerce Department said orders at U.S. factories slumped for a fourth month.

This followed Monday's data showing that US auto sales plunged 36 percent in December while construction spending fell 0.6 percent in November.

Europe's economy is also looking weak. From Bloomberg:

Europe’s manufacturing and service industries contracted for a seventh month in December as the economy slid deeper into a recession.

A composite index of both industries dropped to 38.2, the lowest since the survey began in 1998, from 38.9 in November...

Markit’s manufacturing index fell to 33.9 last month from 35.6 in November, while the services gauge declined to 42.1 from 42.5...

At least inflation in the euro area is moderating quickly, slowing to 1.6 percent in December from 2.1 percent in November.

Meanwhile, there were also gloomy data coming out from the UK. Bloomberg reports:

U.K. services from restaurants to airlines shrank at close to the fastest pace in at least a dozen years and house prices fell by the most since 1991, suggesting that the recession is intensifying.

An index based on a survey of about 700 service companies by the Chartered Institute of Purchasing and Supply was at 40.2 in December, compared with November’s 40.1, which was the lowest since the gauge began in 1996, Markit said today. The average price of a home fell an annual 15.9 percent in December, Nationwide Building Society said in a separate report.

Consumer confidence dropped to the lowest since at least 2004 in December as rising unemployment rattled shoppers, Nationwide also said today...

Other CIPS surveys for last month also show that the contraction is sharpening. The index for manufacturing was at 34.9 and the construction index dropped to 29.3, the lowest since records began in 1997.

However, investors are looking past the gloomy economic data. Bloomberg reports yesterday's stock market action.

U.S. stocks gained, recovering yesterday’s losses, on speculation President-elect Barack Obama’s $775 billion package of tax cuts and government spending will revive the economy...

The Standard & Poor’s 500 Index rose 0.8 percent to 934.70, rebounding from yesterday’s 0.5 percent drop and climbing to the highest since Nov. 5. The index is up 3.5 percent in 2009 after sliding 38 percent in 2008, its worst yearly loss since 1937. The Dow Jones Industrial Average increased 62.21 points, or 0.7 percent, to 9,015.1. The Russell 2000 Index added 1.9 percent...

Europe’s Dow Jones Stoxx 600 Index rose for a sixth day, adding 2 percent as forecasts from U.K. retailers reassured investors. More than five shares rose for every four that fell in the MSCI Asia Pacific Index, which slipped 0.2 percent.

US economy needs big stimulus but can it afford one?

Bloomberg reports that the US economy is in dire straits.

The engines that have lifted the U.S. economy out of every recession since World War II will be of little help this time around.

Inventory rebuilding, household spending, home construction and payroll growth -- the forces that powered, to a greater or lesser extent, each recovery since 1945 -- may remain missing for much of 2009. A glut of unsold properties may keep housing depressed, while shriveled savings will discourage consumers. Companies may be reluctant to restock and rehire while their profits are squeezed.

So Fed officials are looking for a big fiscal stimulus. From Bloomberg:

Federal Reserve officials, after taking the historic step of cutting the benchmark interest rate to as low as zero, are calling for greater government spending to help revive the U.S. economy.

San Francisco Fed President Janet Yellen said yesterday at an economics conference in San Francisco that “it’s worth pulling out all the stops” with an economic recovery package. Charles Evans, president of the Chicago Fed, told the same gathering he believes a “big stimulus is appropriate.”

Paul Krugman also wants government action.

“If we don’t act swiftly and boldly,” declared President-elect Barack Obama in his latest weekly address, “we could see a much deeper economic downturn that could lead to double-digit unemployment.” If you ask me, he was understating the case.

The fact is that recent economic numbers have been terrifying, not just in the United States but around the world. Manufacturing, in particular, is plunging everywhere. Banks aren’t lending; businesses and consumers aren’t spending. Let’s not mince words: This looks an awful lot like the beginning of a second Great Depression.

So will we “act swiftly and boldly” enough to stop that from happening? We’ll soon find out.

But Willem Buiter thinks the US cannot afford the expected stimulus.

Given the bad fiscal position of the US Federal government and given the vulnerability of the external position of the US and its growing reliance on foreign funding, the scope for expansionary fiscal policy in the US is much more limited than president-elect Obama’s advisers appear to realise. Underneath the effective demand problem is a deep structural rot, especially in household sector and financial sector balance sheets. Keynesian cyclical policy options that would be open to more structurally sound economies should therefore not be tried on anything like the same scale by the US authorities.

Global manufacturing shrinks, stocks jump

The global manufacturing slump continued in December.

Bloomberg reports the latest ISM figures.

The Institute for Supply Management’s factory index fell to 32.4, below economists’ forecasts and the lowest level since 1980, from 36.2 the prior month. Readings less than 50 signal contraction. The group’s new-orders measure reached the lowest level on record and prices slid the most since 1949.

Bloomberg reports similar weakness in European manufacturing.

A measure of manufacturing fell to 33.9 last month from 35.6 in November, according to a survey of purchasing managers by Markit Economics. That was lower than a Dec. 16 calculation of 34.5 and the weakest since the report was introduced in 1998. A reading below 50 indicates contraction.

There was a slight improvement in the manufacturing index for the UK, although the sector continued to shrink. From the Telegraph:

The Chartered Institute of Purchasing and Supply/Markit index of manufacturing activity rose to 34.9 last month – just slightly above November's record low of 34.5 on a scale where figures under 50 indicate a contraction.

Reuters reports a similar situation in China.

Chinese factories slashed output and workers at a record pace in December and manufacturing activity overall fell for a fifth month as the global financial crisis hit export demand, a survey by brokerage CLSA showed on Friday...

CLSA's Purchasing Managers' Index (PMI) rose to 41.2, up from the record low of 40.9 in November, indicating that while manufacturing was still shrinking, the pace had slowed from November's record.

But it's a new year, and investors can't wait to get back into the markets. From Bloomberg:

The S&P 500 rose 3.2 percent to 931.8, capping its first three-day gain in five weeks and best start to a year since 2003. The Dow Jones Industrial Average increased 258.3 points, or 2.9 percent, to 9,034.69. The Russell 2000 Index of small U.S. companies advanced 1.3 percent.

Both the S&P 500 and Dow climbed to their highest closes since the first week of November...

Europe’s Dow Jones Stoxx 600 Index climbed 3.1 percent today, while the MSCI Asia Pacific excluding Japan Index increased for a fifth day. South Korea’s president pledged to counter the economic slowdown, while India’s central bank cut interest rates for the fourth time in less than three months, extending the steepest set of reductions since 2000.

Markets suffer painful 2008

For sure, 2008 is a year that investors will not forget for a long time.

What started out as a correction in house prices in the United States eventually dragged down virtually all asset prices. With the help of financial innovations, banks had extended too much credit over the past few years and become extremely leveraged. That leverage helped drive asset prices up in the boom years but once prices went into reverse, the high leverage also exacerbated the decline in prices.

Faced with falling asset values, overleveraged banks were forced to restrict credit, thus adversely affecting the economy as well. The US economy entered recession in December 2007 and was joined by the euro area and Japan in 2008.

Stock markets around the world fell sharply in 2008, with many experiencing record losses. The following table shows the decline in stock markets around the world based on the Morgan Stanley Capital International indices.

	Local currency (percent)	US dollars (percent)
USA	-38.58	-38.58
Japan	-43.62	-30.52
UK	-31.55	-50.56
Germany	-44.51	-47.24
France	-42.06	-44.92

And it was not just the developed markets that suffered. Emerging markets went from being big winners in 2007 to being big losers in 2008. The so-called BRIC were among the biggest casualties.

	Local currency (percent)	US dollars (percent)
Brazil	-44.50	-57.64
Russia	-72.57	-74.16
India	-56.82	-65.07
China	-52.23	-51.94

If stocks performed poorly, commodities proved to be no refuge. The Reuters/Jefferies CRB Index fell 36 percent in 2008.

Inflation fears in the early part of the year, fed by a surge in the prices of commodities in the previous few years as well as early 2008, vanished abruptly as prices experienced a major reversal midway through the year. The price of crude oil, for example, hit a record US$147.27 a barrel in July, then fell dramatically thereafter. It ended the year at US$44.60, down 54 percent for the year, its biggest yearly loss since oil futures started trading in New York in 1983.

Gold proved to be an exception to the wider trend of falling prices. Its status as a safe haven and currency alternative enabled it to post a 5.5 percent gain for the year.

The flight from risky assets meant that the yen carry trade reversed. The yen rose about 23 percent against the US dollar and 29 percent against the euro.

Risk aversion was also obvious in the bond market. For example, the spread between Moody's seasoned Baa corporate bond yield and the US 10-year Treasury yield was about 250 basis points at the start of 2008. By the end of the year, it had widened to almost 600 basis points.

Will markets see further weakness in 2009? Obviously, no one knows for sure.

Some analysts think that a recovery in 2009 is likely. They suggest that after the huge losses already seen in 2008, markets may have discounted the worst.

Furthermore, governments all over the world are taking action to mitigate the adverse impact of the financial turmoil on the economy. Monetary policies have been eased and fiscal stimuli have been planned, which should eventually lead to a recovery in the economy and financial markets.

On the other hand, others point out that the excesses in credit expansion and leverage that had been built up over the past few years were too large to be purged so quickly.

Nouriel Roubini, Professor of Economics at the Stern School of Business, New York University, Chairman of RGE Monitor and one of the few economists to have foreseen the current financial crisis, is one of those who are not optimistic.

In a recent article entitled "Will Banks and Financial Markets Recover in 2009?", Roubini wrote: "The United States will certainly experience its worst recession in decades, a deep and protracted contraction lasting about 24 months through the end of 2009. Moreover, the entire global economy will contract."

This means that for equities and other risky assets, there are still "significant downside risks". The credit crunch will get worse and deleveraging will continue.

He concludes that "2009 will be a painful year of global recession and further financial stresses, losses, and bankruptcies".