When even the officially sanctioned Chinese media is referring to “ Black Monday”, you know that things aren’t great. After Friday’s late fall on Wall Street, the Shanghai market got hammered overnight, down 8.5 per cent, and not surprisingly markets worldwide took a battering. European stockmarkets ended around 5 per cent lower on average, but in a day of extraordinary volatility, US stocks made a comeback by around the time Europe was closing. Who know where next?
The falls of the last few trading days in Europe have been significant and will be a knock to investment and pension funds, as well as those with direct market holdings. The commentary internationally now breaks down into two broad camps.
One is that equity markets had got well ahead of themselves and were pricing in more profits than companies were going to be able to deliver given the slow growth environment. On this view, unless there are more positive signs of world growth, markets could remain on a downward trend.
The alternative view is that, despite the problems in China, the big developed economies remain more or less on track and that sooner or later markets will settle. In a comment this morning, UBS, the major investment house, said that “last week’s economic data was not bad enough to change our fundamental outlook for global growth.” The brokers say that while investors should expect more volatility, “ we expect this bout of risk aversion to pass, with equities in developed markets resuming their upward trend.” They feel the US and Europe remain broadly on course to deliver improved growth. At lunchtime on Monday, with red numbers everywhere, that looked like a brave call, though the later recovery suggsted it had its supporters.
For much of Monday we were watching risk aversion and panic, with a massive early sell off in New York and big falls in commodity markets, where oil prices continue to drop. There are specific reasons why some shares are falling - those exposed to mineral or oil production, for example, or selling to the Chinese market. However the general sell-off reflects a wider fear about global growth and the impact of a Chinese slowdown. The opaque nature of the Chinese economy and the uncertainty about what exactly is happening is not helping.
Complicating matters is the discussion on when the US Federal Reserve Board - the Fed – will move to push up interest rates. A few weeks ago it had been expected to start pushing up rates in September, but now a majority expect it to hold off. The Fed’s dilemma highlights the fact that the major central banks have little room to inject more stimulus after the extraordinary monetary expansion or recent years. Nor do many governments have the scope to push up spending or tax cuts significantly.
For Ireland, it will be a case of waiting and seeing how this develops. Any big global slowdown would be bound to affect our growth forecasts, though it is way too soon to predict that this will happen. A rise in the euro wil not help our exporters. On the plus side, the crisis makes it more likely that interest rates will stay lower for longer – good for an indebted economy with an indebted population – and lower oil prices will also benefit us.
But it is nervous times for investors, with enough “unknown unknowns” around to keep this one bubbling .
