Worldwide stock markets have today received a welcome, although unexpected boost with news that the US Federal Reserve have reduced US base rates by 0.5% to 5.75%.  In a move which was designed to both inject liquidity into the money markets, and give the economy a much need boost, stock markets have rebounded sharply from recent lows.  But is the worst over?

While a move such as that experienced today is not so unusual, in the past it has often precluded more bad news which the Fed were aware of, but which was maybe not yet in the public domain.  Even though the markets have good reason for this show of short term relief, the situation is far from over and there will still be further fallout.

True, there will be more readily available liquidity in the markets which may see many firms over their bad times, but some companies have already suffered beyond reasonable repair.  Many of Wall Street’s larger companies have become embroiled in the situation, and the fact that many are looking to be bailed out by larger banks around the world is a marked change from their front running attitude of the past.

The stock market is a volatile and unpredictable beast at the best of times, and it has a habit of biting back just when you think you have tamed the beast.  Today’s substantial buying pressure has been greatly received, but those who think the situation is now over may soon be disappointed.  The central banks around the world cannot support such man-made situations forever, and there will be some form of accountability at some stage - “pay back time”. 

Once the current euphoria calms, many will still wake up to the fact that the US property market is still in big trouble, personal debt has never been higher, and much of the recent stock market rise was pinned on the back of takover and merger rumours.  It is highly unlikely that we will see an immediate move back to wild takeover speculation, something which may bring many more share price valuations back into line with reality.

It is essential that investor tread cautiously in what is still a difficult period for world markets.

Commonly referred to as the “suckers rally”, worldwide stock markets have returned to their recent down trend after a recent rally which tempted some back into the market.  After a few days of rest bite, we are now seeing the first cautious statements from some of worlds largest companies, with many forecasting that the situation will get worse before its gets better.

We have seen statements from retailers, manufacturers and investment companies, all of whom have taken a similar line in their reading of the situations.  The next step will be some official reductions in the expected growth of both local and worldwide economies, which could well lead to further profit downgrades and even sell recommendations.  When you also consider that a vast number of recent takeovers rumours will soon disappear, as funding becomes more and more expensive, the premium in many share prices will soon evaporate.

Attempts by central banks around the world to shore up the money markets, by injecting much need liquidity, have had a short term impact but they cannot continue bailing out the markets for much longer.  Sooner or later the market will find its natural level, a level which will be a reflection of the concerns of the moment.

All in all the next few months are going to be vital for both local and the world economy, although the probable slow down in economies may well reduce the likelihood of further base rate rises both in the UK and across the Atlantic.  However, for many investors, both directly and indirectly exposed to the stock market, this will be little compensation with stock prices likely to be under pressure for some time to come.

While the US sub prime lending crisis continues to unfold, the effects are now being seen on the European markets with above average demands for cash from those banks who have seen their balance sheets effected over the last few weeks.  Even the European Central Bank (ECB) are playing their part, injecting some $130 million into the system.  So what really is happening?

The concerns about sub prime lending in the US, and the deterioration in worldwide stock markets, have been the main catalyst for the recent money market problems.  While on the surface the problems appears to be confined to the US for the moment, today’s financial markets are very different from years gone by.  Complicated financial instruments are now common place, with many mortgages, loans and other financial investments chopped, split and repackaged for sale to other financial institutions.  As a consequence, many of the worlds largest banks will have substantial exposure to the US market, and many will be suffering at the moment.

The strength of the ECB support has spooked many in the market, as the reaction has been even above and beyond the support for 9/11.  Do the ECB know something which is not public knowledge or are they just trying to calm markets? Until the know sub prime lending situations unravels there will be those sceptical about the level of support, and the fact that the ECB have commented that more funding will be available, as and when required.

In the meantime the short term lull in the fall of worldwide stock markets is over, with both the US and European markets taking a hit over the last few days.  The worst situation for any stock market is one of uncertainty, and until the picture becomes clearer we can expect many more days of wild fluctuations.

Stocks are spiraling downward, surprisingly since it was only a few days ago that they were improving. The biggest part of the problem is that the issue over defaulted mortgage loans is still fresh and now investors are looking at bonds rather than stocks.

Recently many homes have been foreclosed upon because the free lending methods of the past backfired and all those bad credit home loans banks thought they would cash in on went belly up causing a big stir in the financial world. When things seemed to be settling down somewhat the problem arose again when American Home Mortgage Investment disclosed that it had hired advisors to help guide them. The end result may be that they must sell some of their assets, although this will not happen if the mortgage company is able to access its credit.

Towards the end of last week the Dow Jones tumbled hundreds of points and really scared investors. However, when the new week began it looked as if things might be working out in the world of stocks as the Dow gained almost 100 points. However, Tuesday rolls around and sees a loss of more than 100 points. This left investors a little anxious because it was difficult to tell exactly where the market was going.

Other aspects that are not helping the Dow Jones any include that oil prices reached a price of $78 for the first time ever. Gold had a higher price as well. With the market jumping up and down investors should be prepared for more of the same. Of course, better than expected earnings for any of the big businesses could turn things around for the Dow Jones but while the market is worried over lending and whether or not companies will be able to receive loans the market will be finicky.

It seems strange that the Dow Jones reached a record of 14,000.41 in July and then just a few days later managed to fall an astonishing 5%. Believe it or not but some investors believe the worst has yet to be seen and that it is possible for another 5% drop. That remains to be seen but investors should prepare themselves for a volatile market that may be high one day and tumbling the next.

Of course, long-term investors likely have little to be concerned over because they may sit tight and wait for the storm to pass. It is hard to do however when it appears the market is going straight for the toilet. Nevertheless, long term predictions for the Dow Jones look good so investors may prefer to ride out the bad wave and then be in position when the Dow starts rising again.

This is especially true now that many lending institutions are changing their standards for home loans and subprime lenders are more than likely going to be required to have higher credit to be approved than the borrowers that have recently defaulted on so many loans.

As we see the fallout from problems in the US sub-prime credit industry continue, it is now starting to have a major impact upon other stock market around the world.  All of the major markets such as the UK and Japan are moving in tandem with the current volatile attitude of US investors.  So where next for world wide markets?

Over the last couple of years we have seen worldwide stock markets buoyed by takeovers, mergers and a high level of corporate activity.  This search for the next “takeover” has pushed many sectors and individual share prices to unsustainable levels, levels which do not represent the true value of a company.

The recent bout of investor profit taking, and general lack of confidence in the market has seen the so called “takeover” premium evaporate form many share prices, with many observers believing that fair value for many sectors is still some way off.  On top of this we have an ongoing crisis in the US sub-prime lending market, a market which has historically “called” the turning point of many economic cycles.

In the words of the old stock market saying, “the US sneezes and the UK catches a cold”, a phrase which now has great relevance to the rest of the world.  The US is such a power house in world trade that any fall out in their own economy is sure to effect worldwide markets.  Investors should expect a continuation in the current down trend, as well as much volatility along the way.  While there appears little chance of a crash, it is well worth keeping a close eye on the markets!

As surprising as it may seem, the US stock market has hit a new all time high, against a backdrop of a creaking economy, an over extended housing market and the lowest levels of savings per member of the population for a long time.  So what really is driving the markets, and why?

There are a number of factors which are currently driving the markets which include :-

Corporate Activity

The US corporate sector is currently going through a period of major reorganisation, with many companies becoming the subject of takeover approaches or merger offers.  This has led to a highly speculative attitude from investors, who are determined not to miss out on the “next big deal”.  As price valuations get pushed to the limit, there are many investors who will suffer large losses in due course. 

If each corporate rumour where to occur, we would be seeing takeover and mergers everyday for the next year, and this is just not possible.  As some stage there will be a realisation that share valuations are being pushed to the limit, and it is just not viable for many to be valued so highly.

Feel Good Factor

Many American citizens have seen a major increase in the value of their properties over the last few years, with more and more “releasing equity” from their homes to further extend their investment portfolios.  This has led to a rush of new money into the market, which has squeezed prices higher and higher, with echoes of the 1987 crash - over exuberance and irrational investor behaviour.

Conclusion

There are now real concerns that the market is being primed for a major fall at some stage in the not too distant future.  Recent figures from the economy showed that retail spending fell sharply last month, a move which was discounted by many still chasing the next big takeover.  US average debt is growing, savings rates are at there lowest for some time and many home owners are struggling to cover their rising mortgage payments -  a recipe for success?