More volatility for stock markets

The Prague Stock Exchange was swept into the wave of panic that hit world markets Aug. 8 in the wake of a downgrade to the U.S. credit rating and sluggish growth that is stoking fears of another recession. European markets were further rattled by continued intervention in the debt-ridden eurozone countries.

Prague's PX index tumbled 5.95 percent Aug. 8 to 1,027 points, the biggest drop since May 2009. Listed company CME lost 34.7 percent, AAA Auto lost 30.9 percent, and NWR dropped 32.4 percent. In the past month, 169 billion Kč ($9.9 billion) in value has been lost on the exchange.

Other European markets didn't fare much better. The DAX in Frankfurt and London's FTSE 100 both dropped 2 percent. The CAC index in Paris fell 1.9 percent.

After a protracted debate in the U.S. Congress produced an eleventh-hour agreement on raising the debt ceiling just before the country defaulted, ratings agency Standard & Poor's (S&P) lowered the U.S. credit rating from AAA to AA+.

"We took a dimmer view of the political setting in the United States - the governability. This is not how most highly rated governments run themselves," John Chambers, ratings head at S&P's, told the Associated Press Aug. 8.

Though the credit downgrade may have pushed stocks over the edge, analysts say confidence had been dwindling for some time.

"Markets sort of issued their own downgrade, since the sell-off started well before S&P's announcement," said Aleš Tůma, an analyst with the advisory firm Partners. "We've spent the past couple of years sweeping problems under the carpet, but they won't go away."

Debt problems in peripheral eurozone countries won't go away, either. On Aug. 8, the European Central Bank (ECB) announced it would begin buying Spanish and Italian bonds to alleviate some of the pressure on the deeply indebted countries and quell investor fears that the two countries are next in line for a bailout a la Greece, Ireland and Portugal.

Soaring Italian and Spanish bond yields, which have tipped over 6 percent recently, fell Aug. 9 on news of the ECB support.

Ondřej Matuška of Conseq Investment told the daily Hospodářské noviny the current tumult could push up the price of German (and, hence, Czech) bonds. This would likely step up purchases by investors looking for a stable instrument, according to Tůma.

"But this safe-haven status is not guaranteed to last forever," he said.

Tůma said markets will remain tense in the weeks to come.

"Will we see hyperinflation and mobs scavenging empty stores for the last bits of food? Definitely not," he said. "More volatility? Very likely."

Emily Thompson can be reached at
ethompson@praguepost.com