Increasing confidence that the worst of the credit crisis is over boosted world stocks on Monday while inflation concerns grew with oil prices heading towards a barrel. Investors have stopped taking it for granted the United States Federal Reserve will cut interest rates later in the week, although most still expect such a move.
Signs of life in the United States housing market combined with JPMorgan's higher bid for Bear Stearns to push global equity markets up sharply on Tuesday, and sent corporate debt demand soaring. The dollar remained weak, however, while eurozone government bond prices took a hefty hit as equities rose.
Global stocks fell and the dollar tumbled on Monday as a fire sale of Bear Stearns and an emergency Federal Reserve cut of a key lending rate sparked fears that a worldwide credit crisis will claim more casualties. European shares sank more than 3%, following a sell-off in Asia where Japan's leading indexes shed more than 3,5%.
Recession fears following the biggest United States job losses in five years mixed with strains in the credit market on Monday to depress stocks and the dollar and drive investors to search for safety. European shares got off to a poor start and Japan's benchmark Nikkei index closed at a two-and-a-half year low.
It is hard not to be a bit jolly when you are surrounded by peers in a Swiss ski resort, but the world's business leaders have been remarkably optimistic at this week's World Economic Forum in Davos. The problems of the future are taken seriously, but there is little in the way of hand-wringing. This may be because the global economy appears relatively robust.
The collapse of the Doha round of trade talks on Monday is just one more pressure point on financial markets already bruised by interest rate uncertainty, fear of economic retrenchment and escalating geopolitical tension. It robs investors who believe in the wealth creating properties of globalisation of the prospect of yet more openness, replacing it instead with worries about growing protectionism.