Dow's plunge may be sign of bad times ahead
17 May 2010 by Goh Eng Yeow
IT IS easy to dismiss the recent mayhem on Wall Street when the Dow Jones Industrial Average plunged by almost 1,000 points in a few minutes as just one more technical error.
Make no mistake, this could also be a signal that something more serious is amiss.
Sure, the odd computer could have caused the mess after a 'fat finger error' - traders' lingo for someone pushing the wrong button.
Initial reports suggested an anonymous dealer pressed a 'b' for billion instead of an 'm' for million in a sell order.
But those familiar with the operations of a stock dealing room will know that orders are not executed in this manner. To ensure that a rogue trader does not break the bank, limits are imposed on how much a dealer can buy or sell each time.
Any trading limits he is given will certainly not amount to billions of dollars - not even among large global lenders used to handling enormous sums every day.
Instead, the plunge reflects extreme nervousness among traders as they react to a host of crises - from the European debt crisis to the United States Securities and Exchange Commission's allegations against Goldman Sachs for securities fraud.
Some traders also observe that this is not the first time that a terrifying plunge by the Dow presaged more ominous events ahead.
Take early 2007. Just as investors were looking forward to another bumper year, the Dow suddenly plummeted by 416.02 points on Feb 27.
And like the heart-thumping plunge more than a week ago, the dive in 2007 was blamed on a computer glitch.
It turned out to be a harbinger of ill-tidings, forewarning the world of the sub-prime crisis in the US that was then a distant threat on the horizon.
With this background in mind, how should we interpret the Dow's latest roller-coaster ride?
Those who argue that it is business as usual rest their case on the strong quarterly corporate earnings that banks and major corporations have been announcing.
Surely this points the way to a smooth recovery ahead, as the world economy regains its poise after being hobbled by the global financial crisis over the past two years.
They observe that another major market concern had been tackled last week as well - a €750 billion (S$1.3 trillion) 'shock and awe' bailout plan by the European Union to save Europe from attacks by speculators.
But bearish investors argue that while there is an air of prosperity here as Singapore recovers from the global financial crisis, traders are becoming jittery over Wall Street's wild mood swings as it reacts to each twist and turn in the European debt crisis.
It comes as no consolation to find Wall Street registering another triple-digit loss last Friday, as the beguiling market calm following the announcement of the huge bailout was shattered by a fresh attack on the euro.
Traders fear that the interbank market may freeze up again as European banks grow suspicious of each other's debt exposure to countries like Greece, and stop lending altogether.
There is also the problem festering in our backyard - the overheating property market in China and the collateral damage this might inflict on mainland banks' balance sheets.
To shore up their balance sheets, Chinese lenders are making huge cash calls, unnerving investors as the liquidity is sucked out from the region.
Another nightmare looming is the prospect of rising interest rates in the months ahead - and the negative impact this may have on stock prices.
For the past 15 months, the global stock market rally has been supported by a huge cushion of liquidity provided by the US central bank as it trimmed interest rates to almost zero to fight recession.
But jitters in the interbank market as banks grow suspicious of each other, as well as an urgent need to tackle the inflationary pressure sparked by buoyant commodity prices and soaring property prices, may well push interest rates sharply higher.
So it is not surprising to find stock prices stuck in a rut and trading activity falling as investors ponder their next move. Each time, when the market convinces itself that it is back to business as usual, something comes along to rock it out of its complacency.
One thing is for sure: Don't take things for granted. There are likely to be more wild swings in the stock market ahead. Stay posted.
IT IS easy to dismiss the recent mayhem on Wall Street when the Dow Jones Industrial Average plunged by almost 1,000 points in a few minutes as just one more technical error.
Make no mistake, this could also be a signal that something more serious is amiss.
Sure, the odd computer could have caused the mess after a 'fat finger error' - traders' lingo for someone pushing the wrong button.
Initial reports suggested an anonymous dealer pressed a 'b' for billion instead of an 'm' for million in a sell order.
But those familiar with the operations of a stock dealing room will know that orders are not executed in this manner. To ensure that a rogue trader does not break the bank, limits are imposed on how much a dealer can buy or sell each time.
Any trading limits he is given will certainly not amount to billions of dollars - not even among large global lenders used to handling enormous sums every day.
Instead, the plunge reflects extreme nervousness among traders as they react to a host of crises - from the European debt crisis to the United States Securities and Exchange Commission's allegations against Goldman Sachs for securities fraud.
Some traders also observe that this is not the first time that a terrifying plunge by the Dow presaged more ominous events ahead.
Take early 2007. Just as investors were looking forward to another bumper year, the Dow suddenly plummeted by 416.02 points on Feb 27.
And like the heart-thumping plunge more than a week ago, the dive in 2007 was blamed on a computer glitch.
It turned out to be a harbinger of ill-tidings, forewarning the world of the sub-prime crisis in the US that was then a distant threat on the horizon.
With this background in mind, how should we interpret the Dow's latest roller-coaster ride?
Those who argue that it is business as usual rest their case on the strong quarterly corporate earnings that banks and major corporations have been announcing.
Surely this points the way to a smooth recovery ahead, as the world economy regains its poise after being hobbled by the global financial crisis over the past two years.
They observe that another major market concern had been tackled last week as well - a €750 billion (S$1.3 trillion) 'shock and awe' bailout plan by the European Union to save Europe from attacks by speculators.
But bearish investors argue that while there is an air of prosperity here as Singapore recovers from the global financial crisis, traders are becoming jittery over Wall Street's wild mood swings as it reacts to each twist and turn in the European debt crisis.
It comes as no consolation to find Wall Street registering another triple-digit loss last Friday, as the beguiling market calm following the announcement of the huge bailout was shattered by a fresh attack on the euro.
Traders fear that the interbank market may freeze up again as European banks grow suspicious of each other's debt exposure to countries like Greece, and stop lending altogether.
There is also the problem festering in our backyard - the overheating property market in China and the collateral damage this might inflict on mainland banks' balance sheets.
To shore up their balance sheets, Chinese lenders are making huge cash calls, unnerving investors as the liquidity is sucked out from the region.
Another nightmare looming is the prospect of rising interest rates in the months ahead - and the negative impact this may have on stock prices.
For the past 15 months, the global stock market rally has been supported by a huge cushion of liquidity provided by the US central bank as it trimmed interest rates to almost zero to fight recession.
But jitters in the interbank market as banks grow suspicious of each other, as well as an urgent need to tackle the inflationary pressure sparked by buoyant commodity prices and soaring property prices, may well push interest rates sharply higher.
So it is not surprising to find stock prices stuck in a rut and trading activity falling as investors ponder their next move. Each time, when the market convinces itself that it is back to business as usual, something comes along to rock it out of its complacency.
One thing is for sure: Don't take things for granted. There are likely to be more wild swings in the stock market ahead. Stay posted.
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