MercoPress. South Atlantic News Agency

Uncertain week for global markets: all eyes on China

Global stock markets face an uncertain week after a slump in China and fears of an economic slowdown in United States saw the biggest sell-off in more than four years.

Analysts anticipate a repeat of last week's volatility as markets readjust and begin settling down once the bottom has been reached. However the big question is whether this is the start of a long-term trend adjustment, when the markets switch from a bullish to bearish view, or a short-term correction. By close of trading on Friday, indexes had tumbled across the US, Europe, Asia and Latinamerica with the Dow Jones falling 4.2%. Investors blamed factors from a new tax in China and the US housing market for the decision to dump stocks. The size of last week's sell-off may have caught investors by surprise, but observers had been warning that a market correction was on the making. Many of the world's top indexes and shares had climbed back to levels not seen since the dotcom bubble was burst in 2000, fanning fears that they had become overvalued. China's Shanghai market, which sparked the sell-off by falling almost 9% on Tuesday, its biggest decline for a decade, has more than doubled (130%) in value since the end of 2005. At the same time, there have been an increasing number of signs that the US economy may have been slowing down more severely than was previously forecast. On Wednesday, the government said that the US economy grew at a rate of 2.2% in the last three months of 2006, down from a previous estimate of 3.5% and below analysts' forecasts. Former Federal Reserve chairman Alan Greenspan did little to calm markets when he said last week that there was a possibility that the US economy would go into recession by the end of the year. Later in the week he talked of possible but nor probable. His successor, Ben Bernanke, did his best to calm investors, though to little effect and the tumble continued giving the Dow Jones its worst week since March 2003. In Latinamerica, following on Wall Street, closed Friday with strong slumps, Sao Paulo 2.3%; Argentina 2%, Chile 3%, Mexico 2%. The big question is whether this is the start of a long-term trend adjustment, when the markets switch from a bullish to bearish view, or a short-term correction. They also pointed to the fact that over the past few years, investors have had access to cheap money thanks to low interest rates, US, EU and Japan that has allowed them to borrow and often put the cash in riskier markets. With global interest rates on the increase, it now seems that many investors are looking to pay off the loans they used to invest and are unwinding risky positions in favor of more secure investments such as bonds.