What’s happening to global stock markets?

By on October 16, 2014
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Share indices across the world have tumbled since their summer peak and there could be more losses to come.

The mood around the exchanges is looking distinctly bearish. The FTSE 100, Dow, NASDAQ and S&P have all fallen between four and eight percent since the heady days of mid-September. While the idea of stockbrokers moping forlornly and wondering where all their money’s gone might cheer you up, that’s hardly good news for the economy.

So where did it all go wrong? And what happened to our recovery?

Quantitative easing

Quantitative easing (QE) was big during the recession, but now it’s, like, totally last season, yah? America’s Federal Reserve has had its foot plonked firmly on the monetary gas pedal for years, pumping liquidity into the economy by buying government bonds, while keeping interest rates Tarmac-scrapingly low.

Not only does this release funds directly into the economy, but also it increases the price and decreases the yield of the bonds, so that these safe investments become less attractive. Consequently, the thinking goes, investors put their newfound liquidity into higher-return equities, providing a stimulus to growth.

The prospect of the Fed taking its foot off the QE gas spooked investors. Suddenly all those obscure emerging market deals seem a little hairier compared to those nice government securities. It’s no coincidence that the markets started to fall on 19thSeptember, two days after the Federal Reserve announced that QE would end in October.

But investors must have known QE couldn’t last forever as the recovery gained pace, and are aware that the European Central Bank will probably start a QE programme of its own before long, so it’s unlikely to be the whole story.

Europe

Perhaps UKIP is right, and all our problems are really to be found across the Channel. Greece and Spain continue to languish, German manufacturing data is dismal and the French economy is just mal. If this sleeping-on-the-job giant isn’t in recovery after all, then the global recovery itself is surely at risk of being pulled back into recession with it.

Europe, however, hasn’t had strong numbers for years. Again, the fact that Germany might be on the brink of recession again is hardly surprising news. Shares respond to changes in conditions, not continuity, so the prime mover is likely to be found elsewhere.

Ebola, Isis and Syria

The world doesn’t seem all that safe right now, and that’s hardly going to bump up sales of west African cruises or exports to Syria. Crises inherently provoke uncertainty, which is poison to the equity markets generally. On the other hand, the world wasn’t exactly a bed of roses before September, was it? Ebola and Isis will hurt the world economy, but not sufficiently to sink the markets. At least, not on its own.

China

Now we’re getting somewhere. China’s continuing supply and demand driven growth was crucial to the world shrugging off the recession in the first place. The world’s second largest economy (or its largest, if you believe some sources) has dipped recently, and this has crippled global commodity prices.

At the same time, the value of oil has dropped dramatically, as shale pushed US production through the roof. All this has struck oil and mining firms badly across the world, in turn hitting the indices. Firms in these sectors listed on AIM have lost half their value since the end of 2012, contributing heavily to the alternative index’s 21.3% fall this year.

The shares were overpriced

All the above factors between them have contributed to bearish sentiment, but the reason the slide in market value has been so sharp is that equities were overpriced before. Investors perhaps got carried away with all those glamorous IPOs, hiking prices well above earnings. And, when there’s nothing behind the rise, what goes up must come down.

Does this mean then that we should expect a continued slide? Perhaps not. Chances are the market is simply readjusting overinflated prices and factoring in a number of known weakness. But then, of course, who sees a crash coming?

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