Stock markets around the world experienced a historic sell-off as nervous investors dumped risky assets. The Dow Jones Index experienced its worst weekly decline in its storied 112-year history — down 18%. Stock markets across the globe experienced unprecedented declines as well (the MSCI ACWI Ex US Index plunged 21.5%). Major stock market indexes are now down more than 40% off their highs reached in October 2007.
Governments around the world are taking dramatic steps to resolve the financial crisis. Groundbreaking measures came out of Washington every day this week to help buttress the markets, and a coordinated effort to restore stability is underway among leading global economic powers.
Below are key government initiatives taking place just this past week:
- On Monday, the Federal Reserve announced it will double the amount of money it makes available to the nation’s banks.
- On Tuesday, the Federal Reserve went further to encourage lending between companies by announcing a new program in which it would buy commercial paper. (Commercial paper is used by businesses to obtain the short-term financing they need to operate.)
- On Wednesday, the Federal Reserve launched the first coordinated interest rate cut since 2001 in which the United States, Canada, England, the European Union, Sweden and Switzerland all cut rates. The Federal Reserve cut its key funds rate from 2.0% to 1.5%, with market expectations of further rates cuts in the months ahead.
- On Thursday, Treasury Secretary Paulson announced that the government was working on a plan to use part of the $700 billion bailout monies to infuse capital into financial institutions through stock purchases.
- Finance ministers from all G-7 nations met Friday and Saturday to agree on actions needed to prevent important financial institutions from failing and to take steps to improve credit market conditions.
Other major events/economic data shaping this week:
- Consumer credit declined $7.9 billion in August, the largest one-month decline on record.
- The worst hit equity sectors were energy and oil related as commodity prices plunged and crude oil fell more than $16 a barrel for the week to close at $77.70.
- Short-term Treasury yields fell considerably with a massive flight-to-safety.
- Deflationary expectations are growing with the sizable drop in commodity prices, slower economic growth and higher unemployment.
- Spreads on both investment-grade and high-yield bonds (as well as other sectors of the fixed income market) soared to historic levels this week.
- Volatility reached an all-time high on Monday, and continued its climb from there with each day more volatile than the next.
- The trade deficit narrowed in August to -$59.1 billion.