Falling stock markets: here we go again...

19 October 2014 - 02:06 By JEREMY WARNER
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NAIL BITING: A trader watches the DAX index board at the Frankfurt Stock Exchange this week
NAIL BITING: A trader watches the DAX index board at the Frankfurt Stock Exchange this week
Image: Picture: REUTERS

FOR stock markets, October is historically the cruellest month. This year is no exception.

The crashes of 1929, 1987, 2001 and 2008 were all focused on this portentous month. And amid signs of another perfect storm of negatives brewing in the world economy, stocks are again plummeting.

Since the beginning of last month, the FTSE 100 has fallen more than 10%, with much of the drop concentrated in the past week - a level of deterioration that satisfies the official definition of a full-blown stock market correction.

For many European bourses, it has been a much worse. Greece is back in classic bear-market territory, scarcely believable so soon after the previous one.

Not since the peak of the eurozone crisis in 2011-12 have we seen such manifest panic. Before that, it was the collapse of Lehman Brothers, six years ago. Nor is it just equities; bond yields, too, are back at levels that indicate a danger of deflation and depression. There is normally a trigger event for such meltdowns, but unless it be the Ebola outbreak in West Africa this time the reason is not entirely clear. Rather, there has been a steady build-up of worry, culminating in an emerging consensus at last week's meeting of the International Monetary Fund in Washington that the global recovery is again in danger of stalling.

For some economies, still struggling to climb back to precrisis levels of output, prospects again look truly desperate.

The epicentre of alarm this time is again Europe, where the economic and political risks climbed steeply in recent weeks.

Europe's southern economies are gripped by conditions reminiscent of the Great Depression and Italy's Five Star protest movement has vowed a referendum on euro membership.

In Greece, the ultra-leftist Syriza undertook to repudiate virtually all aspects of the eurozone austerity programme, even though the country has little chance of regaining access to debt markets once outside it.

An extraordinarily low inflation reading for last month reinforced fear that the eurozone is on the slippery slope to deflation, a condition that, if it became established, would seem to condemn Europe to a repeat of Japan's 20-year slump, and would further steepen the challenge of getting on top of mountainous public debt.

With falling prices come delayed spending and investment decisions and a steady ratcheting up of existing debt burdens. In such circumstances, eventual default by heavily indebted nations becomes virtually inevitable.

A tanking oil price, which in itself is partly a response to fast abating global demand, has further raised the chances of Europe succumbing to the illness, although by putting more money in people's pockets it should in time prove helpful to the global economy.

Not that the plunging oil price is all about weaker demand.

Normally, such pressures would be countered by cuts in production at Opec's big swing nation, Saudi Arabia. This time round, the Saudis have decided not to play ball, in apparent determination to inflict damage on other, higher-cost producers. These geopolitical aspects of the price correction have added to anxiety in financial markets.

There are also signs of a slowdown elsewhere with China caught between a rock and a hard place - the imperative of growth at all costs knocking up against evident concern in the Communist Party about repeating the mistakes of the West.

Attempts to dampen the credit-fuelled boom of the post-crisis era may have slowed Chinese growth to below 7%, a level that would be regarded as stellar by Western standards but which for China is close to disastrous.

This has, in turn, inflicted damage on the big export nations of Germany and Japan and those emerging economies heavily reliant on the commodities boom, such as Brazil.

Even the US shows early signs of stumbling. Such is the degree of concern that two members of the Federal Reserve's open markets committee have broken ranks to express reservations about ending asset purchases as scheduled this month, and suggested that the Fed might be forced to consider a fourth round of them, the QE4.

Market expectations of a US interest-rate rise have been pushed back from the middle of next year to well into 2016.

Overlaying it all is an even more concerning narrative: that fault lines exposed by the financial crisis, from dysfunction in Europe to growing imbalances between surplus and deficit nations, and growing debt almost everywhere, have largely not been addressed.

Worse, that attempts to smooth the post-crisis adjustment with fiscal and monetary stimulus have succeeded only in delaying the reckoning, or even adding to it.

There is also Ebola. We know from less lethal diseases that international pandemics induce a high degree of behavioural aversion with negative consequences for the world economy.

IMF boss Christine Lagarde said last week that another global recession was avoidable if surplus and deficit nations did the right things.

Is there any likelihood of that? Regrettably little. - ©The Daily Telegraph, London

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