A primer on the markets' descent

 
A trader holds his head Wall Street's Dow Jones lost more than 4% in early trading on Thursday

I am a bit of a believer that when there is nothing new to say, it's best to keep schtoom. And there isn't really anything new to say about today's precipitous falls in share prices.

But not all of you have been sitting in the front seat of global stock markets' roller coaster ride of the past three weeks - mostly downhill with the odd 360 degree loop.

So here's a reminder of what's generating all that fear and loathing in the investment community.

The sequence goes like this: data shows the US economy is weak plus hints from regulators that European banks are fragile generates tumbling shares, every time.

The recession anxieties were exacerbated today by a higher-than-expected rise in new claims for unemployment benefits in the US and by data showing that factory activity in eastern Pennsylvania, southern New Jersey and Delaware has plummeted.

Confidence wasn't exactly boosted by a report from the US investment bank Morgan Stanley which downgraded projections for global growth and which also described the US and Europe as being "dangerously close to recession".

And then there was the failure earlier this week of President Sarkozy of France and Chancellor Merkel of Germany to do anything perceived to be substantive to quarantine European banks from the pernicious impact of eroding confidence in the ability of some eurozone government to repay all their debts.

Market Data

Last Updated at 05:42 ET

Market index Current value Trend Variation % variation
Dow Jones 16493.37 Down -69.93 -0.42%
Nasdaq 4352.64 Down -17.13 -0.39%
S&P 500 1925.15 Down -5.52 -0.29%
FTSE 100 6679.18 Down -50.93 -0.76%
Dax 9210.08 Down -197.40 -2.10%
BBC Global 30 7113.56 Up 10.01 0.14%

(If you want to understand the transmission mechanism from the weakness of government finances to the weakness of banks, I wrote about it recently).

So when the Wall Street Journal reported this morning that US regulators have been meeting the American arms of big European banks to seek reassurance that they have sufficient access to funds to withstand systemic shocks, investors saw this not as reassuring, pre-emptive, evasive action by regulators but as confirmation that the banks are indeed ailing.

Anyway we are heading back to the share-price lows we plumbed before the European Central Bank and the US Federal Reserve did what they could last week to ward off a sovereign debt crisis in Europe and stem a return to economic contraction in the US (respectively).

Which for those who see markets as emotional rather than rational institutions, will revive fears that the down elevator for shares may not end its descent for some time yet.

Update 16:25: I forgot to mention that bank shares have been particularly weak (predictably).

In the UK, the share prices of Lloyds, Royal Bank of Scotland and Barclays have tumbled around 10% - and have all fallen more than 50% from highs reached earlier in 2011.

So in the past few months, well over £60bn has been wiped off the value of these three banks alone.

 
Robert Peston, economics editor Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    0

    Comment number 228.

    Now that the size limit has been removed, I look forward to reading a number of detailed, carefully thought out options to replace the failed capitalist system.

  • rate this
    0

    Comment number 227.

    JH

    Your pessimism is overdone.The present government is offering 100.000 apprenticeships.There has been a switch from arts to science and mathematics among A level students in the past five years.Unfortunately the loss of EMA and high fees will put off able working class students from training.Even apprenticeships have a high bar to entry.

    Welfare is more intractable.To socialize the long term unemployed into work is not enough,unskilled and semi skilled jobs don`t exist in sufficient numbers,they`ve been exported.Retraining is the only viable solution,otherwise you are merely creating a revolving door.

    Retraining has to be associated with an industrial policy for investment and growth.Otherwise we will export our skilled workforce as well.

  • rate this
    -1

    Comment number 226.

    I am getting tired of this. These banks take their buoyant share prices as indicators to pay their executives exorbitant salaries/bonuses and the same shares’ decline means everybody around them should “buck up” whether through imposed austerity or give them direct capital injections for the banks’ benefits.

    I think this ‘everybody sacrifices except us’ method of economic management is no more the ‘too big to fail’ imposition on the rest of us, but really an unconstitutional economic take-over of countries. We have been too polite with these ‘sneaky’ institutions; it’s time to outsourced commercial banking of struggling OECD countries to other banks.

    China’s and India’s banking systems with total large population would have the requisite experience to manage those of struggling OECD nations. Even Singapore with a population of about 4 million has the competence to take care of any one of 25 states of USA with similar or lesser sized population.

    The later 3 countries and many others have the necessary developmental economics experience for taking over the commercial banking system of decrepit nations.
    Yes, I hear you argue that that these alternative banks are not of mega-sized quality. But then what the OECD countries are doing is simply trying to maintain status quos which really have no validity in the face of demanding efficiency through competition.

    Let the dead die, feeding ‘zombie’ banks is not economic development or growth.

  • rate this
    0

    Comment number 225.

    re #222 johnharris66
    High rates of taxation will be required to fund an ever-expanding welfare state.
    ###
    Agreed. One of the reasons it is imperative for GO to get inflation to zero or less.

    And also a good reason for tackling the debt+deficit.

  • rate this
    +1

    Comment number 224.

    Like many others I think all we are seeing is a re-alignment of the market to where it should have been if we hadn't had the unsustainable boom years.
    Those clever people in trading find ways to push the markets forward so they can justify their existance (and bonuses), but they have stretched the elastic band betweeen their dream land and reality past the breaking point. Now the game has changed from fleecing us in a self generated rising market, to fleecing us in a self generated falling market.
    I wonder if we'll ever ge back to shares being priced at what the company is worth, probably not !

 

Comments 5 of 228

 

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