It’s been a “dreadful summer” for global equities, says David Oakley in the FT. In August, many markets saw their worst monthly slide since the one in October 2008 that followed Lehman’s collapse. The pan-European FTSE Eurofirst 300 index slid by almost 11%. No wonder, says The Guardian’s Heather Stewart. August “was the month of shattered illusions”. The US debt stand-off made it clear that “Washington was not the cockpit of the world’s unrivalled economic superpower, but a chaotic bearpit”, while France and Germany couldn’t agree on a new rescue plan for the eurozone debt crisis.
Not only can policymakers not agree, but they’re rapidly running out of weapons that could potentially bolster growth anyway. Interest rates are near zero and there’s no money for another round of bank recapitalisation if there’s another banking crisis. Meanwhile, the macroeconomic data deteriorated rapidly.
If that sums up August, September is shaping up to be even worse. In the past few days there have been more signs that the global economy could be slipping back into recession. Last month saw zero net job creation in America. Global manufacturing surveys pointed to shrinking activity in the eurozone and miniscule growth in America and Britain. The British services sector is also only just growing.
EU leaders continue to face a “dangerous combination of austerity exhaustion [and] bail-out fatigue”, says Standard Chartered. Italy, which is too big for the EU to bail out, is backtracking on its austerity package and its bond yields are on the rise again, raising the spectre of default. The Greek government is missing its rescue package targets. Germany looks ever less likely to ride to the rescue, given the eurosceptic populace and the government’s poor showings in recent regional elections.
Not only is the political and economic backdrop lousy, but market history also bodes ill for this month. In America, which sets the tone for world markets, September is the S&P 500 index’s worst month, with an average decline of 1.1% since 1929. As Roger Bootle of Capital Economics points out, crises have often happened in September – witness Lehman’s collapse and the pound’s exit from the ERM in 1992. Furthermore, the 1929 and 1987 market crashes happened in October. “Fasten your seat belts: we could be in for an interesting few weeks.”