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Stock markets around the world were this week braced for fresh falls despite attempts by the G7 leading industrial nations and the International Monetary Fund to boost confidence after last Friday’s plunge in share prices on Wall Street.
The IMF’s key policy-making committee said at the weekend that the recent turmoil in financial markets would lead to slower growth and that “downside risks to the outlook have increased”.
On Friday, the 20th anniversary of the 1987 Black Monday market crash, Wall Street fell 367 points.
The selling was triggered by a profits warning from the earth-moving equipment group Caterpillar and lower-than-expected earnings from Wachovia, the fourth largest bank in the US Analysts said the combination served to remind investors that the problems of the crunch in credit markets and the slowdown in the US housing market have not gone away.
Nick Parsons, head of markets strategy at nabCapital in London, said: “I have the feeling this is going to be a very, very tricky week. The surprise is not that (the market) is going to fall now. The surprise is that it has risen as much as it has over the last four or five weeks.”
Behind the scenes at the annual meetings of the Fund and the World Bank, some policy-makers admitted that they were concerned about a disorderly unwinding of the global imbalances triggered by a rapid fall in the value of the dollar.
The outgoing managing director of the IMF, Rodrigo de Rato, added to pressure on the greenback when he said that “in the medium term, the dollar is overvalued”, adding: “The markets are also betting right now that the dollar is overvalued.”
Some decline in the dollar is seen by the IMF as necessary for an orderly solution to the problem at the heart of the global imbalances - the trade surpluses built up by China and other Asian exporters and the trade deficit run by the United States.
Markets fear, however, that a too rapid decline in the dollar could set off a chain reaction through the global economy of rising inflation and slower growth and were looking for some signs at the weekend that policy-makers had a plan for smooth adjustments on the exchanges.
Yet the communique from the IMF’s international monetary and financial committee released last Saturday provided no explicit support for the dollar and exchange rates were not discussed at Friday’s meeting of G7 finance ministers and central bank governors.
The Fund and the G7 both kept up the pressure on China to re-value its currency, with the IMF communique noting that “an orderly unwinding of global imbalances, while sustaining global growth, is a shared responsibility”.
It also urged the US to use tougher tax and spending policies to cut its trade deficit, and Europe and Japan to implement structural reforms of their economies.
Amid growing concern that a period of slower growth could fan protectionist pressures in the west, the IMF called for a “prompt and ambitious” conclusion to the stalled Doha round of trade talks”.
Pascal Lamy, the director general of the World Trade Organisation, told the IMFC that “the hour of trade is very rapidly approaching” for negotiators.
A fresh attempt will be made to break the deadlock in the next month but Mr Lamy said that after six years of talks it was “probably our last chance to move this round to a successful conclusion”.
