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Recently there have been more than a few commentators worrying that we’re overdue a correction. Well, they got one yesterday.
A 9% fall in China’s hugely overheated stock market managed to trigger knock-on sell-offs in markets across the world. The FTSE 100 ended the day down 2.3%,148 points lower, while the Dow Jones lost a hefty 3.3% to close 416 points lower. Other global markets were hammered uniformly.
Now arguably, a single-digit slide in what is, after all, an emerging market which few foreign investors have direct access to, should not be important enough to knock the US market for six.
So are investors just jittery and looking for any excuse to take profits – or is this the start of something bigger?
China’s slide took everyone by surprise – and no one was entirely sure of the reason behind it. The newswires scrabbled at everything from fears over Iran (as if the Middle East had been a quiet haven of global stability until yesterday) to an apparent assassination attempt on Dick Cheney (might have been a big deal on US soil, but he was in Afghanistan at the time, where random suicide bomber attacks are not exactly rare).
This morning the papers have settled on the news that China is clamping down on stock market speculation as being the main reason for the fear gripping the markets. Meanwhile, a warning from Alan Greenspan earlier in the week that the US might see a recession by the end of the year also had investors on their guard.
But even so – a 400-point fall in the Dow? And that wasn’t the worst of it – at one point the market had fallen by more than 500 points, prompting the White House to say it was keeping an eye on the market (though what it might do is entirely unclear).
What seems more likely is that the impetus behind this sell-off has in fact been building for some time. Marc Faber of the The Gloom, Boom & Doom Report told Bloomberg yesterday that the cracks had started to appear in the global credit bubble with the US sub-prime mortgage problems. He then pointed out that India’s stock market has been steadily falling in recent days, even before the Chinese slump.
The US sub-prime nightmare isn’t going away. Yesterday, Freddie Mac, which finances mortgages, clamped down on the sub-prime market, saying that it would no longer buy high-risk loans. “Some of these products that worked in the past don’t work going forward.”
That’s a great thing to say with hindsight about a loan that typically covers 25 years of the most important purchase of the average adult’s life. Maybe someone should have been thinking about what would happen if house prices stalled when they were selling these things to unsuitable borrowers in the first place – but then, that was in the days when house prices only ever went up.
But back to the market slump – there’s also our old friend, the yen carry trade, lurking in the background. When the world didn’t end following Japan’s interest rate hike last week, traders breathed a sigh of relief. But yesterday, the yen (and its European equivalent, the Swiss franc) surged as carry traders rushed to unwind positions amid the market panic. It didn’t help that dollar sentiment took a pounding after US durable goods orders (for things like cars and aircraft) dived 7.8% in January, “far worse than expected”, as Ambrose Evans-Pritchard puts it in The Telegraph.
An unwinding of yen carry trades was one of the reasons behind last year’s sharp global correction in May and June – so it looks as though this upheaval may continue for a while longer, particularly after the ferocity of the reaction in the US.
As Glenn Stevens, governor of Australia’s Reserve Bank, said of the carry trade: “There is something very strange about a G3 country giving out free money. This has an effect on global markets. It is by no means clear that it is a healthy state of affairs to persist.”
He’s right – it’s not healthy. But as we saw from yesterday’s market turmoil – and no doubt today’s too – the end of Japan’s free money bonanza will be very bitter medicine for global markets indeed.
More detail on the markets follows…
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In London, the FTSE 100 fell 148 points yesterday to end the day at 6,286, its lowest level for nearly a month. The broader indices were also sharply lower, with the FTSE 250 down 431 points to 11,180. The biggest casualties were found in the mining sector, with Xstrata, Lonmin and BHP Billiton all falling over 6%. For a full market report, see: London market close.
On the continent, stocks were also under pressure. In Paris, the CAC-40 plunged 174 points to end the day at 5,588. Whilst in Frankfurt, the DAX-30 had fallen 207 points to close at 6,819 yesterday.
Across the Atlantic, US stocks recorded their biggest one-day fall since 2001 yesterday. As mentioned earlier, the Dow Jones fell a staggering 416 points on Tuesday to close at 12,216. The tech-heavy in Nasdaq was down 96 points to 2,407, whilst the S&P 500 lost 50 points to end the day at 1,399.
In London, the FTSE 100 fell 148 points yesterday to end the day at 6,286, its lowest level for nearly a month. The broader indices were also sharply lower, with the FTSE 250 down 431 points to 11,180. The biggest casualties were found in the mining sector, with Xstrata, Lonmin and BHP Billiton all falling over 6%. For a full market report, see: London market close.
On the continent, stocks were also under pressure. In Paris, the CAC-40 plunged 174 points to end the day at 5,588. Whilst in Frankfurt, the DAX-30 had fallen 207 points to close at 6,819 yesterday.
Across the Atlantic, US stocks recorded their biggest one-day fall since 2001 yesterday. As mentioned earlier, the Dow Jones fell a staggering 416 points on Tuesday to close at 12,216. The tech-heavy in Nasdaq was down 96 points to 2,407, whilst the S&P 500 lost 50 points to end the day at 1,399.
In London, the FTSE 100 fell 148 points yesterday to end the day at 6,286, its lowest level for nearly a month. The broader indices were also sharply lower, with the FTSE 250 down 431 points to 11,180. The biggest casualties were found in the mining sector, with Xstrata, Lonmin and BHP Billiton all falling over 6%. For a full market report, see: London market close.
On the continent, stocks were also under pressure. In Paris, the CAC-40 plunged 174 points to end the day at 5,588. Whilst in Frankfurt, the DAX-30 had fallen 207 points to close at 6,819 yesterday.
Across the Atlantic, US stocks recorded their biggest one-day fall since 2001 yesterday. As mentioned earlier, the Dow Jones fell a staggering 416 points on Tuesday to close at 12,216. The tech-heavy in Nasdaq was down 96 points to 2,407, whilst the S&P 500 lost 50 points to end the day at 1,399.
In Asia, the Nikkei added to global stock market losses, closing down 515 points at 17,604 today, although off an intra-day low of 17,382. The Hang Seng fell 496 points to 19,651.
Crude oil was over 1% lower at $60.48 a barrel this morning, as was Brent spot which was last trading at $59.49 a barrel in London.
Spot gold had climbed to $671.50 this morning, up from $661.00 in New York late last night. The yellow metal rebounded from an intra-day low of $660 to soar as high as $679 in Asia trading. Silver, meanwhile, had edged up to $14.29/oz today.
And in London this morning, banking giant HBOS was down 3.5% despite announcing a forecast-beating 14% rise in full-year profit as investors expressed concern over the company’s shrinking retail margin. And the FTSE 100 was continuing its slide this morning: the blue chip index had fallen by as much as 90 points to 6,196 by 0930 GMT.
And our two recommended articles for today…
Why Germany’s economy will outshine Japan
– For the past fifteen years, the world’s second and third-largest economies have seemingly been engaged in a race to the bottom. Both are now on the mend – but Japan has plenty to learn from Germany’s export miracle, says Stephen Roach. If you’re invested in either market, click here to find out what to expect in the long-term: Why Germany’s economy will outshine Japan
What clever copper investors should do now
– Copper investors will know that the market has been anything but shiny in recent months, so is it time to turn bearish? To find out what one important development you should be watching – and how to invest accordingly – read: What clever copper investors should do now