October, a ‘black’ month for stock markets, as well as currencies and commodities

October, remembered for the stock market crashes of 1929 and 1987, has once again confirmed its status as a ‘black month for exchanges’, and the currency and commodity markets have not been spared from unprecedented fluctuations.

In yet another ‘black October’, U.S. stocks lost approximately $2.5 trillion in value, according to the Dow Jones Wilshire 5000 index, which includes almost all stocks in the U.S. This index has plunged 17.7 percent in the past month, marking its largest monthly decline since the great stock market crash in October 1987. In a turbulent October, the Dow Jones index fell more than 14 percent, its largest monthly drop since August 1998, while the S&P index lost 16.8 percent, a decline not seen since October 1987.

European exchanges fared no better. In London, the FTSE index fell 10.7 percent, its largest monthly loss since the great stock market crash of 1987. The Japanese market also suffered, as the Nikkei index fell 24 percent in October, marking its largest monthly decline in 58 years.

As a result, the MSCI World index, which includes stocks from developed countries, lost 19 percent in the past turbulent October. Even more dismal is the fact that the stock exchanges of developing countries experienced a decline of as much as 29 percent, measured by the MSCI index. This is a consequence of the worst financial crisis in the world since the Great Depression of the 1930s and fears of its impact on the real economy, which led investors in October to panic and withdraw capital from risky assets. This occurred despite governments around the world allocating approximately $4 trillion from their budgets for bank recapitalization and guarantees for interbank loans, while the largest central banks in the world lowered interest rates to restore investor confidence and prevent a deep and prolonged recession in the global economy.

This year’s October differs from other ‘black’ months in the past in that it was not only the stock exchanges that suffered. Prices on other markets also surged, particularly in the currency markets. The dollar strengthened by as much as 8 percent in the past month, marking its largest monthly increase since 1991. The dollar index, which shows the value of the U.S. dollar against a basket of six major world currencies, jumped to 85.757. Meanwhile, the euro’s exchange rate against the dollar plummeted by 9.6 percent, its largest monthly drop since its introduction in 1999. The British pound, on the other hand, weakened by 9.7 percent against the dollar, its largest monthly decline in 16 years.

The value of the Japanese yen fluctuated even more. Last month, the euro’s price against the Japanese currency fell to its lowest level in six years, at 113.8 yen, while the dollar’s exchange rate dropped to its lowest level in 13 years, at just 91 yen. The yen strengthened against the dollar by more than 7 percent, marking its largest monthly increase in eight years, while its value against the basket of currencies rose by as much as 15 percent. To prevent such sharp fluctuations in exchange rates, especially of the yen, finance ministers and central bankers from the Group of Seven (G7) most developed countries had to intervene, urgently issuing a joint statement expressing concern over the strong fluctuations in the yen’s exchange rate and the possible consequences for economic and financial stability. Only after that and the interest rate cuts by the U.S. and Japanese central banks did the currency markets somewhat stabilize.

The price of oil was saved, however, by OPEC’s announcement that it would reduce production. After reaching a record $147 per barrel in July, the price of oil has recently been plummeting due to investors’ fears that the recession will lead to a decrease in consumption and thus demand for ‘black gold’. In October alone, the price of oil fell by 32 percent, marking its largest monthly decline in history. From July’s $147, the price of gold plummeted to just around $64, the amount it was last Friday.

Prices of other commodities, sensitive to global demand, are also experiencing sharp declines. For example, the price of platinum fell to just $770 per ounce, after reaching the highest recorded level of $2,290 in March. The price of gold fell to $731 per ounce, or about 21 percent in the past month, marking its largest monthly decline since 1983.

October is usually volatile in the markets, but after such events, investors will certainly be much more cautious next October, analysts conclude. (Hina)