ANALYSIS:Nervous investors lead the flight from risk as European markets take a hammering
FINANCIAL MARKETS began the week in subdued fashion but this turned out to be the calm before another storm.
Escalating euro zone banking fears coupled with awful US economic data triggered eye-popping falls on Thursday.
Falls in the Irish market (4.4 per cent) were dwarfed by declines in Italy (6.1 per cent), Germany (5.8 per cent) and France (5.5 per cent). The French and German declines were the largest one-day falls since November 2008, as was the FTSE 100’s 4.5 per cent.
The flight from risk led to a headlong charge into the perceived safety of UK gilts, which recorded their lowest yields since the 1890s. US action was almost identical, the SP 500 tumbling by 4.4 per cent and bond yields falling below 2 per cent, their lowest point since 1950.
The Vix, widely known as the fear or panic index, rose by more than one-third to 45. The eighth-biggest one-day climb on record, it is within touching distance of last week’s extremely elevated reading (48). Europe’s equivalent, the VStoxx Index, also rose by more than one-third, hitting a high of 47. This uncertainty was certainly in evidence yesterday; the German Dax collapsed in early trade, losing almost 5 per cent, before recovering almost all its losses in the afternoon, with similar reversals in other major markets.
The European banking sector is at the centre of the storm. The cost of insuring senior bonds of European banks against default is higher than when Lehman Brothers collapsed. Sentiment wasn’t helped by Swedish banking official Lars Frisell admitting that “it won’t take much for the interbank market to collapse”, while a Wall Street Journal report also caused market jitters. It reported US authorities were “very concerned” about European banks facing funding difficulties in the US, according to a “senior executive at a major European bank”.
Yesterday, Swiss banking giants Credit Suisse and UBS strenuously denied they had borrowed from the New York Federal Reserve. Nevertheless, banks have borne the brunt of the selling – the market capitalisation of Apple now roughly equals that of the Euro Stoxx banks index, which has 32 constituents.
Things are just as nervy in the US. Morgan Stanley reduced its global growth forecast on Thursday while JP Morgan downgraded its forecast for US growth yesterday. Just three weeks previously, JP Morgan had made “large downward revisions” to its growth forecast in an effort to “get in front of the weaker trajectory of the economy”. Since then, however, “the weakness has gotten back in front of us”. That weakness has been evident in US consumer confidence falling to its lowest level since March 2009 as well as manufacturing data that exceeded fears of pessimistic analysts.
Previous market falls, as Gluskin Sheff analyst and market bear David Rosenberg notes, have triggered interest rate cuts. “The Fed now has no such cannon, nor does it even have a pistol – we are down to unconventional firecrackers,” he said this week.
Bill Gross, manager of the world’s largest bond fund, is also spooked. “Recession likely as markets recognise impotency of policymakers,” he tweeted yesterday.
Nobel economist Paul Krugman was even more downcast, warning that policymakers are “replaying 1937” and the “lesser depression will go on and on”.
Sentiment may be poor, but it is not apocalyptic. Retail sentiment surveys show ordinary investors have actually become more bullish. The recent falls saw the SP 500 make a 200-day low, and data confirms markets remain volatile for months after such an event. Such a scenario indicates that the benign market action that preceded Thursday’s weakness was an oversold market bounce rather than the start of something more promising.
