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Weekly Focus

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Financial markets hit stormy weather

Fri, Mar 2 2007, 16:43 GMT
by Danske Research Team

Danske Bank A/S

The past week has been dominated by events on the fi-nancial markets, where volatility has risen and investors are suddenly gripped by fear. Global equity indexes have fallen as a result, and a number of risky, high-yielding currencies have weakened. Many investors have sought a safe haven in the calmer waters of the major bond markets in the USA, Europe and Japan, which have seen yields fall.

In hindsight, there were perhaps several reasons for investors to be jittery: Greenspan had warned of recession, increasing concern about imbalances in Central and Eastern Europe (see last week’s editorial), and problems in the US subprime mortgage market. While some of these factors may be real enough, the past week’s events were perhaps more due to a psychological shift – the glass was suddenly half empty rather than half full.

We do not believe that the recent turmoil is a warning of an impending global meltdown. The prospects for growth in the global economy remain healthy. On the other hand, it has long been clear that risk-taking has been very aggressive and that many investors have geared without fully considering the consequences. Until just a few days ago no-one cared to hear about imbalances, overheating and financial risk.

Events in the past week or two may therefore just be a sign of a return to “normality”, where investors are more aware of the relationship between risk and return. If so, it is then still too early to say if this particular storm has passed.

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Published on  Fri, Mar 2 2007, 16:48 GMT