I learned quite a few things during four and half years working directly in financial markets, three of them are worth stating right now; the first causality of market turmoil is usually a sense of perspective, when market news is leading the main bulletins the story has probably moved on and, finally, markets rarely fall in a straight line.
In this spirit I thought it might be worth trying to provide some realistic and non-panglossian quick market commentary.
At the time of writing the markets are performing reasonably well, all things considered – the bond markets are behaving themselves; the equity market falls are limited. Apocalypse seems to have been averted, or at the very least postponed. That said, as we saw on Friday, markets can gyrate wildly during the day.
There’s a tendency, given the rapid availability of information, to assume that important market moves happen in hours and days – and sometimes they do – late 2008 being an excellent example.
But more often they move in weeks and months. The credit crunch began in August 2007 with the seizing up of the credit markets (although the first clues maybe came in June 2007 with the failure of two Bear Sterns hedge funds), Northern Rock failed in September 2007, central banks co-ordinated rate cuts in January 2008 as equity markets crashed, Bear Sterns failed in March 2008, worries developed throughout the summer of that year, Freddie May and Fannie Mac ran into serious problems in August and Lehman’s happened in September. The resulting market implosion bottomed out in March 2009.
It took a long time to play though and during that time there were many false dawns and (long-ish) periods of calm and market rallies.
That all said, I also remember the February 2007 market panic after the Chinese index fell 10% and the May 2006 commodity-led correction – both of which were contained although felt worrying at the time.
The current market problems feel more like 2008 than 2007 or 2006 but we can’t be absolutely sure.
Despite all of the drama of the past week equity markets remain well above the level of a year ago, let alone above the Q1 2009 lows. This suggests that things aren’t quite as bad as the headlines imply – but also that any fall could go a lot further.
After the major falls last week, we should expect some sort of bounce. The usual pattern of a market fall is two steps down, one step up – not a straight descent.
Just looking at the Eurozone, the US and the UK– where exactly are we?
In Europe– the central problem of underperforming PIIGS economies unable to devalue remains unresolved. The ECB’s intervention today is having the desired effects of driving down yields on Spanish and Italian bonds. But it won’t stop the underlying rot of low growth and an explosive path of debt build-up and nor will it provide much relief from the effects of tough austerity which is strangling growth. More importantly, the real question is how long will it work for? How much money is the (still-divided) ECB prepared to commit to holding down PIIGS bond yields? We can expect the market to test this commitment in the coming days. In the medium term is a situation in which the ECB is the only real buyer of Spanish and Italian debt unsustainable?
In the US the major falls came before the downgrade. A downgrade by one rating agency is unhelpful but not a disaster. US yields are still low. The real issue is not the debt burden but the faltering economy. The driver of the markets in the medium term will be the real economy.
In the UK the issue is similar – horribly low growth and the risk of a double-dip.
In the short term things look better today – but nothing is happening to resolve the fundamental problems of low growth.