Anyone who thought, or hoped, that the financial markets in the world and in Israel had got back on a reasonably quiet track received proof in the past couple of days that the ground is still shaking and that no-one can know whether it's an aftershock or the start of a new wave of volatility and anxiety.
The volatile trend made itself felt distinctly on the foreign exchange market, which reacted to developments overseas and to the possibility that the Bank of Israel will stop buying dollars, which was denied after a few hours. The US dollar was very weak on world markets yesterday after the minutes of the Federal Reserve's latest monetary policy meeting revealed that some senior figures at the US central bank advocate expanding bond and mortgage backed security purchases. The response to the fear of even greater monetary expansion was a dollar falling to its lowest levels in seven months and a1% depreciation against the euro.
In the event, the fall in the dollar was the signal for an upsurge in almost all the phenomena associated with greater uncertainty. Commodities, oil, and gold all rose, a sign of fear that volatility and uncertainty are returning. It can be assumed that for the time being investors all over the world will be much more sensitive to every scrap of news that hints at possible woes, in contrast to the "end of the recession" atmosphere that prevailed on financial markets in the past few weeks.
Anyone who expected these kinds of indications didn't have to wait long. Today, Standard and Poor's cut its rating outlook for the UK, no small shock in itself. That news should serve as a warning for anyone who proposes expanding the deficit substantially, and as a reminder that the world still attributes considerable significance to words like risk and deficits. New unemployment projections in the US suggest that unemployment there will reach 9.6%, a higher figure than in previous estimates. That could impair the loan repayment ability of households, worsen the recession, and cause more losses to the banks.
No wonder then that in Israel too, the foreign exchange market's sensitivity to unexpected events has risen --- events such as reports that the Bank of Israel will stop buying foreign currency. Globally, the dollar strengthened slightly, in a response to the sense of uncertainty. However, it is not clear how currencies will behave over time, if reports continue to emerge that give the lie to the picture of "business as usual" that so many on the financial markets wanted to believe in.
Published by Globes [online], Israel business news - www.globes.co.il - on May 21, 2009
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