January 2008 stock market volatility

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January 2008 was an especially volatile month in world stock markets, with a surge in implied volatility measurements of the US-based S&P 500 index [1], and a sharp decrease in non-U.S. stock market prices on Monday, January 21, 2008 (continuing to a lesser extent in some markets on January 22). Some headline writers and a general news columnist called January 21 "Black Monday" and referred to a "global shares crash,"[2][3] though the effects were quite different in different markets.

American stock markets were closed on Monday, January 21 for Martin Luther King, Jr. Day. Seemingly in response to the fall in non-U.S. markets [4], the U.S. Federal Reserve announced a surprise rate cut of 0.75% on Tuesday at 8 a.m. This rate cut is believed to have been influential in preventing large declines in the American stock markets, with the Dow Jones Industrial Average down only 1.1% for the day, never closing that week worse than a 1.6% decrease from the previous Friday, and indeed closed up for the week.[5] Later it was announced that Société Générale, one of the largest banks in Europe, accused its employee Jérôme Kerviel of fraudulent trades costing it €4.9 billion, and causing it to sell approximately €50 billion in European equity derivatives from January 21–23.

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[edit] The events before January 21

Since the spring of 2003, the world equity markets had been on a steady increase with the Dow Jones Industrial Average gaining 70%. Some international markets rose more than US markets. With interest rates at exceptionally low levels, many institutional investors used leverage to increase returns.

The DJIA, reached its peak in October 2007, but declined in the two months before 2008. Led by banks, broker dealers, home builders, and financial insurers, the market closed 2007 near its annual lows.

In the first three weeks of 2008, the Dow Jones Industrial Average fell 9%.[6] On Friday, January 18, 2008 U.S. president George W. Bush proposed a $145 billion stimulus plan,[7] but U.S. stock indices finished lower that day, with the Dow Jones down 0.5%, to 12099.30 and the S&P 500 losing 0.6%, to 1325.19, and the technology-driven NASDAQ 0.3%, to 2340.02.

[edit] Monday, January 21

"India's benchmark stock index tumbled 7.4%, while Hong Kong's blue chip Hang Seng Index plummeted 5.5% to 23,818.86"[8] Over the course of two days, the BSE Sensex in India dropped from 19,013 on Monday morning to 16,370 by Tuesday evening or a two day fall of 13.9%.[9] In the first 21 days of 2008, Japan's Nikkei has lost 13% of its value and Hong Kong's Hang Seng 14%.[10] The Asian crash is thought to have been caused by the fallout from general economic fear stemming from the 2007 subprime mortgage financial crisis triggered by a drop in the U.S. housing market and fears of a U.S. recession.[6]

This was followed by "massive declines in European shares on Monday, January 21, when over $350 billion was wiped off the value of top British, German and French shares — an amount equal to the combined gross domestic product of Hungary and Greece."[5] The European decline is suspected to have been partly caused by the January 2008 fraud scandal at the French bank Société Générale that resulted in a US$7 billion dollar loss by alleged rogue trader Jérôme Kerviel.[5]

The FTSE 100 had its biggest ever one-day points fall,[11] Asian stocks dropped as much as 15%[12] with the BSE Sensex making its highest ever day's loss of 1408 points.[9]

The Toronto Stock Exchange suffered its biggest one-day loss in seven years as the composite index fell 4.8% or 605 points.[13]

The U.S. markets were closed for Martin Luther King, Jr. Day.

[edit] Tuesday, January 22

In the early opening Asian markets, the Australian Stock Exchange suffered the largest one-day drop in 18 years of over 7%. The Hang Seng was similarly hit with a drop of over 2000 points (8.7%) over the course of the day, being the largest points drop in the history of the index.[14] Asian markets all fell, with Japan's Nikkei index decreasing more than 5%.

The BSE Sensex index fell again. The market hit the lower circuit breaker and trading was briefly suspended. On reopening at 10.55 AM IST, the market saw its biggest intra-day fall when it hit a low of 15,332, down 2,273 points. However, after reassurance from the Finance Minister of India, the market bounced back to close at 16,730 with a loss of 875 points.[9]

Early trading in Europe showed similar signs, with drops being recorded in the UK and Germany.

In the U.S. Tuesday morning, the Dow Jones and NASDAQ futures were down 5-6% indicating large expected losses for the U.S. markets.[15] Before the U.S. markets opened, the U.S. Federal Reserve cut the federal funds rate by 75 basis points (0.75%) to 3.5%. It was the largest single cut in that key interest rate since October 1984.[16] During the regularly scheduled meeting of January 27-28 the Fed followed that up with an additional 0.5% cut, to 3.0%.

The rate cut occurred in the middle of the European trading day, and European indices recovered. Except for the German DAX index, all major European indices closed higher for the day.[17]

On Tuesday's opening, the Dow Jones index fell 465 points (2.9%) in early trading, prompting fears of a deepening crisis.[18] The FTSE 100 showed large falls and rises through the day, eventually closing up 2.9%. Banks continued to warn of a potential recession.[19] The Dow Jones Average closed Tuesday down 1.1% from Friday's close at 11,971.19.[20]

The Toronto Stock Exchange recovered most of its previous day's losses with a 509-point gain to close at 12,641 as the Bank of Canada also cut its key interest rate during a regularly scheduled rate announcement by a quarter of a percentage point to 4% with possible future rate cuts.[21]

[edit] Wednesday, January 23

The Hong Kong and Australian indices recovered most of their losses from the previous day. Hong Kong had more than a 2000 point gain (10.7%), recording its largest single day point gain. Australia registered a 5% gain, ending a 12-day run of daily drops in the Australian index. The Japanese Nikkei gained 2%.[22]

All European markets fell from the opening, with concerns that local central banks would not cut interest rates. The FTSE ended 2.2% lower, the French CAC 40 was down 4.3%, while the German DAX lost 4.9%.[23]

The Dow rose during intraday trading breaking 12000.[24] The Dow, the NASDAQ, the NYSE and the S&P 500 all closed up for the day. The Dow rallied almost 600 points (4%) from the days lows to the days highs and closed 2.22% higher. It was both the Dow and S&P's best day since November 2007 and the Dow had erased all losses since Thursday January 17.

The TSX closed with a small gain of 16 points recovering from an early-session loss of about 400 points.[25]

[edit] Events after January 23

 Please help improve this article or section by expanding it.
Further information might be found on the talk page or at requests for expansion. (February 2008)

The Dow finished up for the week, the first positive week of 2008.[26] India's Sensex registered its biggest ever gain of 1,139.92 points (6.62%) on the 25th recovering much of its losses from the 21st, but fell by 4% again on reopening on the 28th.[27][28]

[edit] Stock indices throughout the week

Asian and European index changes
Nikkei 225 [29] 28-Dec 21-Jan 22-Jan 23-Jan 24-Jan
Close 15,307.78 13,325.94 12,573.05 12,829.06 13,092.78
Change to Previous   (-3.86%) ▼ (-5.65%) ▼ 2.04% ▲ 2.06% ▲
Year-to-Date   (-12.95%) (-17.86%) (-16.19%) (-14.47%)
Hang Seng Index [30] 31-Dec 21-Jan 22-Jan 23-Jan 24-Jan
Close 27,812.65 23,818.86 21.757.63 24,090.17 23,539.27
Change to Previous   (-5.49%) ▼ (-8.65%) ▼ 10.72% ▲ (-2.29%) ▼
Year-to-Date   (-14.36%) (-21.77%) (-13.38%) (-15.36%)
Euro Stoxx 50 [31] 31-Dec 21-Jan 22-Jan 23-Jan 24-Jan
Close 4,399.72 3,703.05 3,753.68 3,577.99 3,809.77
Change to Previous   (-7.31%) ▼ 1.37% ▲ (-4.68%) ▼ 6.46% ▲
Year-to-Date   (-15,83%) (-14.68%) (-18.68%) (-13.42%)

[edit] References

  1. ^ Markets, Uncertain Times, The Economist, February 4, 2008
  2. ^ MacMahon, Peter. "Market falls continue as £84bn is lost on Black Monday", The Scotsman, Johnston Press Digital Publishing, 2008-01-22. Retrieved on 2008-01-25. 
  3. ^ Sources including:
  4. ^ "The Fed has always strenuously denied use of monetary policy to shield equity investors." [1] Officially, the Fed "took this action in view of a weakening of the economic outlook and increasing downside risks to growth", and not due to stock market activity [2]
  5. ^ a b c "Did SocGen trades trigger market rout, Fed cut?", Reuters, 24 January 2008. 
  6. ^ a b Al Jazeera. "Europe stocks fall for second day", Al Jazeera, 2008-01-22. Retrieved on 2008-01-22. 
  7. ^ Peter Baker and Neil Irwin (2008-01-18). Bush Proposes $145 Billion Stimulus Plan. Washington Post. Retrieved on 2008-01-22.
  8. ^ Associated Press. "Black Monday As Biggest Crash Since 9/11 In Worldwide Markets", Associated Press via KPTM News, 2008-01-21. Retrieved on 2008-01-22. 
  9. ^ a b c rediff Business Bureau (2008-01-21). The 10 biggest falls in Sensex history. MarketWatch. Retrieved on 2008-01-23.
  10. ^ BBC World News. "Global shares tumble on US fears", 2008-01-21. Retrieved on 2008-01-22. 
  11. ^ Allen, Katie. "Footsie's biggest ever one-day points fall", Guardian Unlimited, Guardian News and Media Limited, 2008-01-21. Retrieved on 2008-01-22. 
  12. ^ Our Bureau. "Indian markets join big losers’ list", The Hindu Business Line, Chennai: The Hindu Business Line, 2008-01-21. Retrieved on 2008-01-22. 
  13. ^ CBC News. "TSX joins global market rout", CBC News, CBC, 2008-01-21. Retrieved on 2008-01-23. 
  14. ^ "HK shares in record 8.7pc fall", AFP, The Australian Business, 2008-01-22. Retrieved on 2008-01-23. 
  15. ^ S&P 500 futures extend fall, down 5.3 percent. Reuters (January 22, 2008). Retrieved on 2008-01-23.
  16. ^ Michael M. Grynbaum and John Holusha. "Fed Cuts Rate 0.75% and Stocks Swing", The New York Times, The New York Times Company, 2008-01-22. Retrieved on 2008-01-22. 
  17. ^ "EUROPEAN MARKETS BULLISH, DRIVEN BY FED; ONLY DAX DOWN", Agenzia Giornalistica Italia, 2008-01-23. Retrieved on 2008-01-23. 
  18. ^ BBC News. "Stocks rebound on Fed's rate cut", BBC News, BBC, 2008-01-22. Retrieved on 2008-01-22. 
  19. ^ BBC News. "Fed slashes rates in shock move", BBC News, BBC, 2008-01-22. Retrieved on 2008-01-22. 
  20. ^ MarketWatch, Inc (2008-01-22). Dow Jones Industrial Average.. MarketWatch. Retrieved on 2008-01-23.
  21. ^ CBC. "TSX bounces back with 509-point gain", 2008-01-22. Retrieved on 2008-01-22. 
  22. ^ "Nikkei gains 2 pct after Fed cut but worries remain", Reuters, 20078-0123. Retrieved on 2008-01-23. 
  23. ^ "European stocks hit by rate fears", BBC, 2008-01-23. Retrieved on 2008-01-23. 
  24. ^ Dow Jones Industrial Average Stock Quote. MarketWatch (2008-01-23). Retrieved on 2008-01-23.
  25. ^ CTV (2008-01-23). TSX main index bounces back after volatile day. Retrieved on 2008-01-24.
  26. ^ ^DJI: Basic Chart for DOW JONES INDUSTRIAL AVERAGE IN - Yahoo! Finance
  27. ^ Sensex marks record single-day gain, ends 1,139.92 pts up
  28. ^ Zee News - Sensex,down,650points
  29. ^ Historical prices for NIKKEI 225 (2008-01-25). Retrieved on 2008-01-25.
  30. ^ Historical prices for HANG SENG INDEX (2008-01-25). Retrieved on 2008-01-25.
  31. ^ Historical prices for DJ Euro Stoxx 50 (2008-01-25). Retrieved on 2008-01-25.

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