The sell off continued on Wall Street this week with Financials again bearing the brunt of investor nervousness. A bigger than expected quarterly loss from Lehman Brothers, and news it plans to raise additional capital was what sparked the latest round of selling. The financial giant posted a loss of $2.8 billion which acted to wipe around 28% off the stock value in just 4 days.
The Federal Reserve’s Beige book also reinforced the negative sentiment, saying that inflationary pressures were persisting and that the economic environment was generally weak. Comments from Chairman Ben Bernanke also raised the chance that the central bank would act to lift interest rates later in the year, in an attempt to mitigate the surge in inflation.
Oil was also again on the agenda. Despite pulling away from last week’s high earlier in the week, the price resumed its upward push following a bigger than expected decline in US crude inventories. Transport and airline stocks were subsequently punished as a result, and retailers also came under pressure as investors worried over the impact higher energy costs would have on consumer spending.
The situation was equally bleak in Europe this week, with the London FTSE dropping to a near 2 ½ month low. The French CAC and German DAX were similarly punished with European investors also worrying over energy costs, inflation and losses in the financial sector.
In the UK, economic prospects were hurt by a disappointing employment result. June saw a big rise in jobless claims, and this acted to push the unemployment rate to its highest level in 7 months. Meanwhile, the trade deficit continued to widen as imports growth off-set the rise in exports.
On the upside though, the RICS house price balance came in above the previous months level, suggesting that the troubled housing market is starting to stabilise.
The Japanese market has been holding up better than others recently, but it too was impacted this week by the negativity on Wall Street. Exporters also acted to weigh on the market thanks to continued strength in the yen, while banks followed their off-shore peers into negative territory.
We did see some encouraging data out of Japan this week. Economic growth was revised up to 1% for the first quarter, while the trade surplus and the corporate goods price index was also stronger than expected.
It was a shortened trading week in Australia due to a long weekend, but that didn’t help the Aussie bourse avoid steep losses. Here too it was financials that were the hardest hit, with investment banks like Macquarie sold off on concerns that it could face steep losses. Babcock and Brown was easily the worst performer, carving out a fresh 3 year low on concerns over the value of its assets and its debt levels.
On the economic front, data out this week showed that consumer confidence dropped to its lowest level in 16 years, largely due to mounting fuel costs and higher interest rates. The news is not a good omen for consumer discretionary stocks.
The uncertainty over the credit crisis and its impact on the earnings of financials is proving to have real longevity. Coupled with sustained strength in oil and slowing economic growth it’s proving to be a difficult environment for investors.
As always though, opportunities nonetheless exist. In this environment traders would do well to focus on defensive stocks such as utilities and consumer staples. However, given the tough credit conditions, investors should also focus on those stocks that have reasonable gearing levels and healthy cash flows.