The Decline of Crobex as a Reaction to Yesterday’s Sell-offs on Global Markets?

Today, most analysts at the Zagreb Stock Exchange expect a decline in Crobex as a reaction to yesterday’s panic selling of stocks on global markets, but they also emphasize that stock prices are now significantly discounted solely due to irrational investor fear.

Of the eight analysts from brokerage firms who participated in Hina’s survey, five expect a decline in Crobex today, two expect stagnation, and one expects an increase. The Crobex index plummeted 4.12 percent on Tuesday, to 2,663 points. Regular trading reached nearly 97 million kuna."Fortunately, the domestic stock exchange was closed yesterday, so there was no reaction to the panic selling on global markets. Meanwhile, leading global central banks reacted by lowering reference interest rates, which alleviated losses on European exchanges, and Asian indices were even in the positive this morning. Therefore, anything is possible today," assesses Damir Bićanić, Deputy Executive Director for Investment Banking at Hypo Alpe Adria Group.

He believes it is likely that stock prices on the domestic market will fall today, but a recovery is also possible afterward, as they are now significantly discounted due to irrational investor fear. "There is irrational fear prevailing in markets worldwide, and it is difficult to assess how much longer market participants will be anxious. However, I am confident that central banks and lawmakers will manage to restore confidence, not only in the capital market but also in the global financial industry and economy," says Bićanić.

Stock prices on Wall Street fell sharply on Wednesday, marking the sixth consecutive day of decline, as the coordinated reduction of interest rates by the world’s largest central banks did not convince investors that the economy would avoid recession. However, this morning, investors on Asian markets calmed somewhat after two Asian central banks lowered interest rates, following the example set by the monetary authorities of the U.S. and Europe yesterday, and in Washington, there is also consideration of the possibility for the government to purchase stakes in banks to combat the largest global financial crisis since the Great Depression.

The interbank money market remains nearly paralyzed, and the New York Times (NYT) reports that further government action will be needed to stimulate lending between banks. Therefore, the U.S. Treasury, according to NYT, is considering the possibility of the government purchasing stakes in banks to restore confidence in the interbank market. Banks are reluctant to lend to each other due to fears of hidden losses on their balance sheets, which is why the interbank market is not functioning, and this disrupts lending to companies and individuals worldwide. If the government were to purchase stakes in banks, as the British government first proposed yesterday in its £50 billion plan to rescue the banking system, banks would feel more secure that their loans would be repaid. This new idea is being discussed, writes NYT, in Washington and on Wall Street.

Hina’s survey shows that the focus of investors at the Zagreb Stock Exchange will continue to be primarily on the most liquid issues – T-HT, construction, and shipping stocks. However, in such a situation, higher trading volumes are also possible in less liquid stocks – it all depends on sentiment. "When panic and fear among investors worldwide subside, half of the current problem will be resolved," believes Bićanić. He adds that the domestic economy is largely dependent on global events due to its openness.

"For the domestic economy, it is positive that interest rates are falling globally, as this means cheaper debt for us. However, it is very likely that the exports of Croatian companies will be hampered, as it is quite realistic that Europe and the U.S. will fall into recession after this financial crisis," concludes Bićanić. The International Monetary Fund (IMF) in its latest World Economic Outlook has stated that the current financial turmoil – the worst since the 1930s – could take a heavy economic toll as markets struggle with crises of confidence and a global credit crisis.

In its bleakest forecast in the last seven years, it announced that the global economy is susceptible to a major crisis, and that the U.S. and Europe are already in recession or on the brink of it. It has also cut its growth estimates for the global economy in 2009 to 3.0 percent, which will be the slowest growth rate in the last seven years. For comparison, in July, it estimated global economic growth for the next year at 3.9 percent. This year, the IMF estimates that the global economy will grow by 3.9 percent, slightly below the July forecast of 4.1 percent.   (H)