U.S. stocks dropped further last week, sending the Dow Jones Industrial Average to a six-year low. Many analysts believe that the major reason for the pitiful performance is investors' fears of rising credit card defaults, which are currently considered a major threat to the ailing international economy. Another focus of worries is related to Obama's $787 billion rescue plan, which turned out to be heavy on rhetoric but light on detail. Don't forget that this plan was aimed at further capital injections, purchase of distressed assets and a housing program meant to reduce foreclosures. U.S. corporate giants continue disappointing the investors' universe with poor results. Hewlett Packard announced a 2008 4th quarter profit drop of 13 percent.
The ECB's decision earlier this month to keep interest rates unchanged drove yields on 2-year bonds to the lowest level relative to longer-maturity debt since 1997. While the European Central Bank is facing the dilemma of rate cuts to help the EU economy, many EU member states are solving their own problems by inflating budget deficits. This is deemed illegal by the European Commission 's even in such challenging times (the maximum allowed budget deficit is 3 percent of GDP). The EU executive body has been quick to remind these states, including France, Spain, Greece, Ireland, Malta and Latvia, that their loose budgets may and will result in immediate sanctions and fines. Strangely enough, this attack on delinquent member states was supported by Mr. Trichet, the head of ECB, who considered the situation as a positive sign of keeping order in any economic conditions. There are doubts, of course, that fines could help as the costs of restricting government spending seem to be even higher. This is clearly stated by Germany, which has increased its state debt to 1.5 trillion euros.
Russia and CIS
Russia published its January production, unemployment and real wages numbers, all of which confirm the bleak macro outlook. Industrial production was down 16 percent year-on-year, surpassing market expectations. Real wages are down 9.1 percent year-on-year on the back of growing unemployment and wage arrears. Unemployment reached 8.1 percent 's the highest jobless rate in four years 's contributing to further consumer capitulation. Adding to the negative news flow, 2009 GDP and industrial output forecasts for Russia were lowered: a 2.2 percent decrease (instead of 0.2 percent) and a 7.4 percent drop (instead of 5.5 percent), respectively. On a positive note, Rosneft and Transneft secured a $25 billion loan from the China Development Bank in exchange for 20 years of crude oil supplies. The ruble reversed its fall against the basket in the week of Feb. 9, with the CBR tightening liquidity and restricting U.S. dollar purchases by banks. However, last week the ruble dropped again and is now trading around 40.5 against the basket following concerns about a significant production and investment decline in the country. All this has led to an increase in CIS CDS (credit default swaps) spreads and Eurobond yields.
*** Written using materials from Reuters and Bloomberg