gives his mea culpa. The U.S. attacks terrorist targets in Afghanistan and Sudan. Japan presents, for better or worse, its version of bank reform.
lock horns. Venezuela's currency nears the brink. Talk of a full-scale capital flight out of developing markets is taken seriously.
People begin to worry that the world is on fire.
Amid these currents and cross-currents, few things are clear except one -- the bull market in stocks -- which some trace back as far as 1982 -- is facing its biggest test in years. Optimists will say things are fine, pointing to the U.S. economy's fine fundamentals, its low inflation and steady growth. Pointing to the
more-than-200-point rebound off its lows on Friday. Pessimists will point to the headlines.
This, then, is the tenor of things going into the coming week. To say that there's uncertainty on Wall Street is a gross understatement. It is difficult to keep track of everything that's going on in the world, much less figure out how to rank them or how one influences the other. Here, at least, are some things to watch.
Asia, for the moment at least, is out of the hot seat. Investors will be closely watching Venezuela, which many believe will devalue its currency, the bolivar, over the weekend. On Friday, Venezuelan central banker
Domingo Maza Zavala
announced that the country would let the bolivar float freely within its set band. Until then, the central bank had tried to keep it within the middle of that range. Though Maza emphasized that Venezuela would defend its currency, currency traders are quick to note that Yeltsin said the ruble would stand on the day before its devaluation.
The worry is that when the bolivar goes, other Latin American countries will come under pressure.
"We think that Venezuela will devalue," said Ethan Harris, economist at
. "They've got elections in the fall, and we think they'll do it before that. We think that Brazil is at risk, but we think they'll be able to withstand the pressure."
But that pressure, Harris warns, will have a damning effect on the Brazilian economy. There are also fears that investors will lose more confidence in Venezuela on the heels of a devaluation, and capital will flee the country. As that happens, some investors may decide that Latin America isn't a very good place to keep their money, and regional bourses will feel further pain -- which, in turn, may convince some investors that Latin America isn't a very safe place to keep their money. And so on. As money continues to exit the region, what had been a market event becomes an economic event.
To not nearly as much fanfare as government officials had probably hoped,
Long-Term Credit Bank
of Japan announced its planned restructuring on Friday. In a government-brokered deal, the ailing LTCB is set to merge with
. Many investors fear that this merger will simply be a return to the old convoy system, whereby a weak bank would be joined to a strong bank -- and saddle it with its problems. Many in the market, and the U.S. government for that matter, would prefer for Japan to let its ailing banks fail. But officials worry -- and they have a point -- that the failure of a major bank would only deepen the crisis of confidence that plagues the Japanese economy. Furthermore, it could have a danger spillover effect on other Asian economies.
It was with these things in mind that the government worked the merger between LTCB and Sumitomo, taking pains to try to ensure that it did not look like a return to the convoy system. Under the deal, LTCB will write off 750 billion yen in bad loans, give up claims on 520 billion yen in loans, end overseas operations, cut 700 employees and force the resignation of top management. LTCB said that it will seek public funds "as soon as possible" to help pay for the restructuring. It appears that it will be taxpayers, not the acquiring bank, that will bear the burden of LTCB's bad loans.
It appears that the government planned to launch a yen intervention -- a move it was widely telegraphing, in tandem with the LTCB restructuring. A fine idea -- until the U.S. went after Middle Eastern terrorists and currency troubles started brewing in Latin America, detracting from any news that might come out of Japan and prompting a flight to the dollar that would not only make an intervention less effective, but would open any intervention attempt to criticism. "What were you guys trying to do, fiddling in the currency market when all this stuff is going on?" traders might have asked.
So the restructuring got announced after the close on Friday.
Market reaction in Tokyo to the deal will be worth watching. Though some have greeted the plan warmly, it has become almost an idee fixe in the market that this deal
a return to the convoy system.
"We're taking an organization that is arguably insolvent and infusing it with public money -- which taxpayers have said they don't want to happen," said Dave Gilmore, an analyst at
Foreign Exchange Analytics
. "And then the
Ministry of Finance
is telling Sumitomo, 'This is a good deal -- take it.'"
Meanwhile officials, who have warned so much that they will intervene, will be looking for some other event to hook their dollar-selling on.
Said Gilmore, "We almost have to have it happen, or they lose all kinds of credibility. I think they're just waiting for a pretext."
Investors in Russia (are there any left?) are holding their collective breath until Monday, when the terms of the government's domestic debt default and swap into new paper will give a clearer picture of the country's finances. The government has called a meeting of Russian and foreign bankers, bond holders and central bank officials at the President Hotel in Moscow for noon Moscow time (4 a.m. EDT) to release the details.
Russia's stock market, meanwhile, has turned into somewhat of a graveyard ahead of the bond swap. Stocks have sold off to levels not seen since before Yeltsin was reelected in 1996. "It's a matter of differentiating worthless assets from inexpensive ones" all over again, wrote
in a Friday research note. Expect prices to be dead in the water until further details of the bond deal emerge.
The focus will likely move from the financial to the geopolitical. With Yeltsin and the Duma at odds, and communists apparently ascendant, fears of a move to strong-arm rule are making their way into the market. The U.S. economy has done well by the peace dividend. Look for chatter about what might happen if it went away.
It is late August, and on Wall Street that means domestic news slows down. Company earnings are, by and large, behind us. The investment bankers and CEOs are all on the beach, so there are few merger announcements. There are few economic data (and anyway, economic data haven't mattered all that much lately). Normally, this signals a slowdown on Wall Street. Investors can feel comfortable kicking back, taking half days.
But not this August, with the avalanche of news the market has faced. Friday's recovery aside, nervousness abounds.
"All these things are taking on more attention than the economy or earnings growth in the U.S.," said Paul Rabbitt, executive director of equity research at
. "In my view, we're in a correction, and there's no reason to see it stop now. I would say we have another 30 to 60 days of this, with the risk to 7600 on the Dow." That's a common theme in the market -- many point out that September is statistically the worst month for the stock market. And October, as we were reminded last year, is no great shakes either.
Still, Rabbitt sees a plus side to all this.
"The long bond is actually less attractive relative to equities," he said. "When this momentum starts to wind down, there should be a nice flight of capital out of long bonds into equities. That's what I would prepare for next. It's not something I would do today."
Yes, it's still in good shape -- and on the face of it, it appears that there is, if anything, a threat of inflation. But with the world in such bad condition, market-seers are likely to start complaining that the
needs to get its face out of the rearview-mirror economic data, see what's happening overseas and cut rates to save the world. A bit shrill, perhaps, but that's where the debate is heading. Not that that's going to get the Fed off its keister.
"I think it's very hard for these guys to think about these outside things affecting us," said Richard Koss, international economist at
. "I think they're going to have to need to see the whites of the eyes of the U.S. economy slowing before they think of moving."
The other argument that will likely get aired is that, with the yield on the long-bond slipping, the Fed will
to cut rates.
"The bond vigilantes are back, but unlike the '80s and early '90s, when they were forcing the Fed to raise rates, now they're rallying the bond," said Rich Bernstein, chief quantitative strategist at
. "Eventually they will probably invert the yield curve, forcing the Fed to ease."
Staff reporter Erin Arvedlund contributed to this story