“We are in an environment where fear feeds on fear,” said Mads Pedersen of UBS. After appearing to find their feet early in the week, markets promptly had another panic attack. The FTSE All World index slid to a two-and-a-half-year low. The FTSE 100, now down 20% from its April record peak and thus officially in a bear market, is down to a three-year low. Oil appears to have been the trigger for the latest bout of jitters. It has slid to a 12-year low around $28 a barrel following a note from the International Energy Agency saying the market “could drown in oversupply” as Iranian crude returns. Fears about China were also a factor.
It’s been a horrendous start to the year, but there could be more to come, reckoned Bank of America Merrill Lynch. Investors “are not yet max bearish”, according to its monthly global fund manager survey. Just 12% think a global recession will occur in the next 12 months, for instance. So there is scope for plenty more investors to join the sell-off.
This is a classic case of “herding”, said former IMF chief economist Olivier Blanchard on Blogs.piie.com. “If other investors sell, it must be because they know something you do not know. Thus, you should sell, and down go stock prices.” It’s happening now, said Blanchard, because the outlook is unusually uncertain: the Fed has just started to normalise monetary policy; we don’t know if China will be able to control its economy; and geopolitical uncertainty is exceptionally widespread.
Yet take a step back, and there is no evidence of a significant slowdown in China or America – or that falling oil prices are bad news. There certainly shouldn’t be “an imminent global recession”, as some fear, agreed George Magnus in Prospect. Year-end data in Europe and America were a bit soft, but labour markets look solid, and it really is “bizarre” that markets see oil prices as bad news: it amounts to a tax cut for the world’s consumers. Britain, for instance, “is enjoying the equivalent of a £7bn tax cut”.
Investors appear to be focusing on the losses of energy and mining companies now that the commodities boom is unwinding, and have forgotten this larger truth. There is no good reason for equity markets’ “bad mood”.