Commentary
This report about stock market movements after the US Federal Reserve's announcement about its new 'operation twist' is similar to most of the analysis and commentary going on around the markets. It is not at all clear what it is that determines stock and bond prices, but it does not appear to be based on anything very much of substance.

In the US the stimulus package and bail out funding that was mobilized in the last days of the Bush administration and then supplemented by the Obama administration was extremely successful in stopping 'the rot' and enabling the global financial system to recover from what was looking like a catastrophic failure. The liquidity injected in the financial markets made it possible for banks and the financials ervices sector to go back to something like 'near normal'.

While stock markets and the financial sector recovered, the 'cash' in the markets did not move into tangible investment where it was most needed. Multinational companies invested in the fast growing emerging markets, but held back from investment in the United States (and I would imagine, also in Europe). With low investment in the USA, the job creation in the USA has been anemic. Because the job situation is poor, the confidence level is poor and the combination means low aggregate demand which feeds into poorer profit projections and lower stock prices.

The root cause of the ongoing weak economy is the inadequate investment flows that would help to satisfy the obvious needs that exist in the US economic situation. Estimates of the backlog in infrastructure for example are multiple trillions of dollars ... but the instituional and financial structure to fund this does not exist. In some ways this should be Federal State and Local Government ... but in other ways these institutions have lost much respect because of the corruption and incompetence they seem to represent.

Many other things are needed in both the US society and throughout the world. Satisfying these needs requires significant economic activity, but the business reality is that many of the important needs cannot be satisfied using the business model of the capitalist market economy. It would be possible to flow funds to satisfy these needs if the idea of 'valueadd' was the driver rather than simply money profit. A value market economy has the potential to get to grips with the problem that is emerging oin the global economy ... something that is starting to look increasingly as 'stagflation'.
Peter Burgess

Warning about the US economy from the Federal Reserve sends world stocks plummeting.

IMAGE The Dow Jones Industrial Average lost 3.5 per cent by the close of trade on Thursday [Reuters]

A grim economic outlook from the US Federal Reserve and signs of slowing growth in China and Germany have pushed world stocks sharply down.

US stocks closed down 3.5 per cent (391.01 points) and European shares fell to a two-year low, dragging an index of global equities to a one-year bottom out.

The US dollar climbed to a seven-month high against an array of major currencies as investors on Thursday dumped riskier trades in favor of the world's most liquid currency.

The sharp rally in the dollar pushed down US crude oil prices by more than five per cent, while gold fell nearly $50 an ounce in a broad retreat in the commodities sector.

'Hidden behind the Greek drama over the past few weeks and unveiled again yesterday with the [Fed] statement and action, the unfolding global economic slowdown is back to front and center,' said Peter Boockvar, equity strategist at Miller Tabakan Company in New York.

Operation Twist

The Dow Jones industrial average fell by as much as 527 points, before paring losses to close at 10,733.83. The Standard & Poor's 500 Index dropped 37.18 points, or 3.2 per cent, at 1,129.58. The Nasdaq Composite Index slid 82.52 points, or 3.3 per cent.

World stocks as measured by the MSCI All Country World Investable Market index were down 4.12 per cent. The more volatile MSCI emerging markets stock index slid 7.02 per cent.

In Europe, Britain's FTSE 100 lost 4.64 per cent, the German DAX lost 4.96 per cent and the French CAC shed 5.25 per cent.

The Federal Reserve warned Wednesday of significant risks to the already weak US economy as it launched a plan, dubbed Operation Twist, to lower long-term borrowing costs and bolster the battered housing market.

'It seems the market doesn't believe Operation Twist is enough to kick-start the spluttering economy,' said Ben Potter, market strategist at IG Markets. 'A very downbeat outlook ... seems to have unsettled markets even further.'

'No clarity'

Asian stocks led the trend by falling sharply on Thursday amid warnings of serious downside risks amid the eurozone debt crisis.

The Tokyo stock exchange closed down 2.07 per cent on Thursday. The benchmark Nikkei 225 index fell 180.90 points to close at 8,560.26, while the Topix index of all first-section issues lost 12.59 points or 1.66 per cent to 744.54.

The markets in Sydney fell 2.63 per cent, or 106.9 points, to 3,964.9 - its lowest in more than two years.

Hong Kong fell 3.74 per cent in the afternoon and Shanghai was 1.76 per cent off, as uncertainty over the global markets had spread across Asia.

Seijiro Takeshita, director of the securities and investment firm Mizuho International, told Al Jazeera that the 'markets have looked at the negativity' in world markets.

The eurozone crisis is one of many factors which has caused uncertainty because 'there is no clarity of what is happening with eurozone', Takeshita said.

Source: Al Jazeera and agencies