The FTSE 100 dropped 0.3%, while France’s CAC was down 1.1%. In Germany, the DAX fell 1%. Across the pond, US benchmarks closed lower on Monday. Wall Street’s S&P 500 dropped around 0.1%, as did Nasdaq and Dow Jones.
World Bank Chief Economist Carmen Reinhart has warned that the global economy is experiencing a period of “exceptional uncertainty.” Reinhart cited an “array of disruptions”, including lockdowns in China, soaring food prices, and the conflict in Ukraine. She said she would not rule out further downgrades to the growth outlook.
On Monday, the World Bank slashed its global growth forecast for the year by almost a full percentage point, to 3.2% from 4.1% because of the added economic pressures of the war in Ukraine.
"Unsurprisingly the weak economic outlook, uncertain geopolitical situation and rising inflationary environment has prompted the World Bank to cut its 2022 global growth outlook," said Michael Hewson, chief market analyst at CMC Markets. "This move is likely to be followed by the IMF later this week as it gets set to meet in Washington."
S&P 500 futures were down 0.4%, while futures on the Dow Jones Industrial Average dropped 0.38%. Nasdaq 100 futures fell 0.29%.
These overnight moves were influenced by the release of March’s highly-anticipated consumer price index on Tuesday. It is expected that the data will reveal an 8.4% annual increase in prices, according to economists polled by Dow Jones. This is the highest level since December 1981, with rising housing, energy, and food costs thought to be the major factor behind the record-high figure.
Speaking to CNBC on Monday, Ed Yardeni, president of Yardeni Research said, “I think by the summer we’ll probably see the CPI inflation rate peaking and then the consumption deflator is going to peak somewhere between 6 and 7% and then come down to maybe 3 to 4% by the second half of the year going into next year.”
“There’s definitely a lot of financial anxiety,” commented Celeste Revelli, a director of financial planning at eMoney Advisor. “It’s difficult to know how long this inflationary moment will last.”
Dow Jones Industrial Average futures climbed 60 points or 0.17%. Meanwhile, S&P 500 futures were up 0.2% and Nasdaq 100 futures increased 0.12%.
The shift follows a tumultuous week for stocks, largely pressured by fears of a Russian attack on Ukraine as well as reports of US inflation reaching its highest level in 40 years.
For the week, the Dow and the S&P 500 dropped 1% and 1.8% respectively. On Friday, the Dow fell 503.53 points or 1.43%. Meanwhile, the S&P 500 dropped 1.9% and the Nasdaq Composite saw a decline of 2.8%.
The White House has warned that a war in Ukraine could come any day now and has urged US citizens to leave the country without delay.
US National Security Adviser Jake Sullivan warned Russian forces were now "in a position to be able to mount a major military action.”
"We obviously cannot predict the future, we don't know exactly what is going to happen, but the risk is now high enough and the threat is now immediate enough that [leaving] is prudent," Sullivan said.
Over the weekend, President Joe Biden attempted to dissuade President Vladimir Putin from attacking Ukraine over a phone call. However, Biden reportedly failed to achieve a breakthrough.
Early trading on Thursday morning saw global share prices go into free-fall as the continued spread of coronavirus threatens to greatly impact international trade. The crash also followed a Wednesday-night speech by President Donald Trump announcing that “all travel from Europe to the United States” would be suspended for 30 days.
Though the Trump administration quickly clarified that only “human travel” from Europe would be restricted, and not trade, Thursday morning’s share price downturn indicated a lack of investor confidence in the new measures’ effectiveness.
The Dow Jones Industrial Average fell by around 8.2 %, driving US indexes further into bear market territory, while Nasdaq fell by 6.5% and the S&P 500 by 7%.
The widespread losses triggered the market’s “circuit breaker”, automatically halting trade for 15 minutes to interrupt the steep decline in prices. Once trading resumed, however, stocks continued to plummet.
Every share in the FTSE 100 was trading lower before markets closed, with the UK’s main share index having suffered a fall of more than 9% in value.
Indexes in Frankfurt and Paris also fell, as did Asian markets, as Japan’s Nikkei 225 index closed 4.4% lower than previously.
While companies have suffered worldwide, travel companies saw some of the worst blows to share prices, with airline conglomerate IAG facing a 10% drop.
This morning's news comes as no surprise given the state of play, but as the Dow Jones hits its third-worst point in history, investors are waking up to the prospect that this may be just the beginning of what’s to come.
Some economists are warning that the pandemic could push the Bank of Canada and the US Federal Reserve to consider cutting interest rates sooner rather than later; a clear sign of more to come. Benjamin Tal, deputy chief economist at CIBC Capital Markets, told The Financial Post: “It is reasonable to assume that coronavirus is going to last longer given the infection rate is higher than SARS and is still climbing. That itself, might convince the Bank of Canada and even the US Fed to cut interest rates. I wouldn’t be surprised.”
“This is just the beginning of coronavirus, and there is a consensus starting to be generated that maybe, it will last longer than expected.”
In terms of numbers, the Dow Jones Industrial Average dropped 1,031 points, or 3.56% on Monday, while the S&P 500 plunged 3.3%, the biggest drop since last August. Global demand for oil has stalled, leaving the price to fall as much as 4% over the weekend. The price of gold on the other hand, went up, as investors attempt to put their money where it’s safe.
According to Frances Donald, chief economist at Manulife Investment Management: “The virus spread comes at a time when companies are already facing significant inventory restocking and a stalling in global manufacturing following the application of tariffs and overall trade tension…Coronavirus is adding salt to the wound.”
The good news is that based on past research from the Bespoke Investment Group, over the past 11 years, declines of more than 2% for the S&P 500 have resulted in healthy rebounds, particularly when the largest drop happens on a Monday. However, both analysts and investors are highly sceptical moving forward, and the next few weeks should give some indication of how stocks will play out in the wake of coronavirus’ furore.
With the 10th anniversary of the Lehman Brothers’ shocking and unprecedented bankruptcy this month, Katina Hristova looks back at the impact the collapse has had and the things that have changed over the last decade.
Saturday 15 September 2018 marked ten years since the US investment bank Lehman Brothers collapsed, sending shockwaves across the financial world, prompting a fall in the Dow Jones and FTSE 100 of 4% and sending global markets into meltdown. It still ranks as the largest bankruptcy in US history. Economists compare the stock market crash to the dotcom bubble and the shock of Black Friday 1987. The fall of Lehman Brothers was a pivotal moment in the global financial crisis that followed. And even though it’s been an entire decade since that dark day when it looked like the whole financial system was at risk, the aftershocks of the financial crisis of 2008 are still rumbling ten years later - economic activity in most of the 24 countries that ended up falling victim to banking crises has still not returned to trend. The 10th anniversary of the Wall Street titan’s collapse provides us with an opportunity to summarise the response to the crisis over the past decade and delve into what has changed and what still needs to.
As we all remember, Lehman Brothers’ fall triggered a broader run on the financial system, leading to a systematic crisis. A study from the Federal Reserve Bank of San Francisco has estimated that the average American will lose $70,000 in lifetime income due to the crisis. Christine Lagarde writes on the IMF blog that to this day, governments continue to ‘feel the pinch’, as public debt in advanced economies has risen by more than 30 percentage points of GDP – ‘partly due to economic weakness, partly due to efforts to stimulate the economy, and partly due to bailing out failing banks’.
Afraid of the increase in systemic risk, policymakers responded to the crisis through quantitative easing and lowering interest rates. On the one hand, quantitative easing’s impact has seen an increase in asset prices, which has ultimately resulted in the continuation of the old adage, the rich get richer and the poor get poorer. The result of Lehman’s shocking failure was the establishment of a pattern of bailouts for the wealthy propped up by austerity for the masses, leading to socio-economic upheavals on a scale not seen for decades. As Ghulam Sorwar, Professor in Finance at the University of Salford Business School points out, growth has been modest and salaries have not kept with inflation, so put simply, despite almost full employment, the majority of us, the ordinary people, are worse off ten years after the fall of Lehman Brothers.
Lowering interest rates on loans on the other hand meant that borrowing money became cheaper for both individuals and nations, with Argentina and Turkey’s struggles being the brightest examples of this move’s consequences. Turkey’s Lira has recently collapsed by almost 50%, which has resulted in currency outflow and a number of cancelled projects, whilst Argentina keeps returning for more and more loans from IMF.
Discussing the things that we still struggle with, Christine Lagarde continues: “Too many banks, especially in Europe, remain weak. Bank capital should probably go up further. 'Too-big-to-fail' remains a problem as banks grow in size and complexity. There has still not been enough progress on how to resolve failing banks, especially across borders. A lot of the murkier activities are moving toward the shadow banking sector. On top of this, continued financial innovation—including from high frequency trading and FinTech—adds to financial stability challenges. In addition, and perhaps most worryingly of all, policymakers are facing substantial pressure from industry to roll back post-crisis regulations.”
The Keynesian renaissance following that fateful September day, often credited for stabilising a fractured global economy on its knees, appears to have slowly ebbed away leaving a financial system that remains vulnerable: an entrenched battalion shoring up its position, waiting for the same directional waves of attack from a dormant enemy, all the while ignoring the movements on its flanks.
If you look more closely, the regulations that politicians and regulators have been working on since the crash are missing one important lesson that Lehman Brothers’ fall and the financial crisis should have taught us. Coming up with 50,000 new regulations to strengthen the financial services market and make banks safer is great, however, it seems that policymakers are still too consumed by the previous crash that they’re not doing anything to prepare for softening the blow of a potential new one. They have been spending a lot of time dealing with higher bank capital requirements instead of looking into protecting the financial services sector from the failure of an individual bank. Banks and businesses will always fail – this is how capitalism works and no one knows if there’ll come a time when we’ll manage to resolve this. Thus, we need to ensure that when another bank collapses, we’ll be more prepared for it. As Mark Littlewood, Director General of the Institute of Economic Affairs, suggests: “policymakers need to be putting in place a regulatory environment that means that when these inevitable bank failures occur, they can fail safely”.
In the future, we may witness the bankruptcy of another major financial institution, we may even witness another financial crisis – perhaps in a different form. However, we need to take as much as we can from Lehman Brothers’ collapse and not limit our actions to coming up with tens of thousands of new regulations targeted at the same problem. We shouldn’t allow for a single bank’s failure to lead us into another global crisis ever again.
Despite a swift comeback from the global stocks chaos last week markets have been shaken up.
Dow Jones closed at 24,601 yesterday, up from the 23,860 low of last Thursday. The plunge happened on the 1st of the month, across the weekend, recovered, and dropped further. Dow Jones is now on a recuperating trajectory. The same drop, recovery and further fall also happened within the same time frame for the S&P 500, NASDAQ and the FTSE 100.
All are on their way back up but fears of increased volatility are floating around. Finance Monthly has collated a number of comments and market responses from experts and economists worldwide in this week’s Your Thoughts.
Phil McHugh, Senior Market Analyst, Currencies Direct:
The switch to risk off in the markets was markedly sharp and severe against an air of positive momentum which ran ahead of the fundamentals. The S&P index fell by more than 4% which was the steepest single day drop since August 2011. The rout continued into Asia markets and the spark was growing concerns that inflation will force borrowing costs higher.
The momentum since the start of the year has been bullish with equities pushing higher and the USD selling off. The honeymoon period for equities has now hit a question mark over potential rising borrowing costs. It can be argued that the bull run had ran somewhat ahead of sentiment with overconfidence creeping in. The higher wage inflation from US payroll data on Friday was the beginning of the doubts and this was enough to encourage some profit taking that has now spilled into a wider sell off.
We have not seen a big correction since Brexit and although we could see further selling pressure it should find support soon on the underlying improved global economic optimism and growth.
In the currency markets the reaction was more balanced but we have seen a defined swing into the classic risk off currencies with the Japanese Yen and Greenback gaining ground.
The pound lost ground after a strong start to the year. The pound tends to suffer in a risk off market and the weaker services data yesterday and concerns over the latest Brexit talks have helped it on its way lower. The next focus for the pound will be the Bank of England meeting on Thursday.
Lee Wild, Head of Equity Strategy, interactive investor:
Just as markets cannot keep rising forever, they must also stop falling at some point, but it’s still unclear whether we’ve reached a level where buyers see value again.
Futures prices had indicated a much brighter start for global markets, but early gains were wiped out in Asia and Europe looks vulnerable. Volatility is back, and investors had better get used to it.
While there’s certainly a case to be made against high valuations, especially in the US, there are lots of decent cheap stocks around. Plenty of investors are itching to bet that concerns about inflation and bond yields are overdone and that any increase in either will be much slower than expected. If that’s the case, a 10% correction in the US looks more like a healthy retracement rather than reason to hit the panic button. Long term investors will be amused by it all and are either choosing to ignore the noise or pick up stock at prices not seen for two months in the US and over a year in London.
There are stark similarities between this sell-off and crashes both in August 2015 and in early 2016 when market volatility reached similarly extreme levels. It took several trading sessions played out over weeks to find a bottom, and it’s likely the same will happen here. Only difference this time is that it’s the tune of US economic data, not China’s currency devaluation that markets are dancing to.
Kasim Zafar, Portfolio Manager, EQ Investors:
Pullbacks in markets are (usually) quite normal and healthy, giving moments of pause where everyone pats themselves over, does a quick sense check and then carries on. In the case of the US equity market it hadn’t fallen more than 5% in 404 trading days (back to June 2016). That’s the longest stretch of ‘uninterrupted’ gains in history, with data back to 1928!
There weren’t enough signs of investor heebie-jeebies around, especially not in January when the US index was up over 7% for the month at one point. That’s pretty extreme and entirely unsustainable.
The equity market has finally taken notice that over the last several weeks bond markets have been reflecting a higher inflation and interest rate environment, so it’s not at all surprising to see some adjustment and a return of some much needed investor fear!
We are going through the quarterly reporting season for US companies currently, which is a good test of what’s happening on the ground. With 264 out of 500 US companies having reported so far, most are reporting positive results for both top line revenue growth and bottom line earnings.
So, as things stand, we see this as a long overdue market correction and if it falls much further we would be looking to increase our equity weightings. Increased volatility is a healthy sign of investors becoming more conscious of the risks inherent in markets.
Ray Downer, Trader, Learn to Trade:
Though you may not knowingly own any shares, there is a high chance that you are paying into a pension scheme which invests in shares and bonds. This means the value of your pension pots is dependent on the value of the investments in it and while investment values increase and decrease all the time and this will have very little noticeable difference to your savings, financially turbulent times like this will impact you in some way, particularly if you’re looking to retire this year.
For now, at Learn to Trade we are looking at this in the context of a correction rather than a reversal. Following this week’s FTSE 100 fall, investors should keep a close eye on the stock markets in the months ahead as the value of the pound has gotten weaker with the sell-off. The Bank of England will announce whether or not it plans to raise interest rates because of this ‘bloodbath’ later this week when it publishes its quarterly inflation report. Should the Bank of England announce a rise in inflation rates, British consumers will have less spending power and will start to feel the pinch of higher costs on imported necessities. The inflation report will give us a clearer picture of how this will impact our everyday spending.
Bodhi Ganguli, Lead Economist, Dun & Bradstreet:
It’s a common misconception that stock market activity is linked to the economy. However, an unexpected and ferocious swing in the stock market is disruptive and can wipe out a significant chunk of wealth from the markets – resulting in economic implications. This week’s activity could mean retail investors could see a significant erosion in their nest egg, which would be bad for future consumer spending.
The latest crash was caused by technical or algorithmic trading, most likely computer-generated as at times the stock market was dropping faster than that can be explained by human intervention. These changes were exacerbated by macro-economic triggers such as the recent US jobs report, which was a strong signal of wage inflation returning. This caused market participants to upgrade their inflation outlook with more Feb rate hikes expected. Bond yields also crept up, setting off a bearish shift in the stock market.
We expect the stock market to stabilise in the near future, but the longer term outlook will be determined by how these fundamental macro-economic triggers interact with each other going forward.
Ken Wong, Client Portfolio Manager, Eastspring Investments:
Currently, the market is going through a much-needed correction as valuations were approaching expensive levels for most markets. In particular, China’s equity markets were up 70% over the past 13 months, and this recent 10% correction from its high is actually not that steep.
Despite the recent market correction, investors in Asian equity markets still seem to be in a better position at a time when corporate America seems more hard pressed to deliver elevated profit expectations while also trading at very expensive valuations. Asian equity markets are trading at a P/B ratio of around 1.7x while US equity markets are still trading at 3.2x P/B after this recent price correction.
Asian corporates in general are still expected to deliver strong corporate earnings and most are in good shape as a result of previous cost cutting and balance sheet restructuring that we have seen over the past few years. Despite the recent market volatility, things are still quite sound in this part of the world, Asian corporates are still expecting to see their earnings grow by around 13% in 2018, with China leading the way with earnings growth expectations of over 20% this year.
For investors concerned about the recent market volatility, they should look at investing in a low volatility equity strategy as we have seen these types of strategies outperform the broader benchmark indices by over 2% over the past few days. The benefits of these low volatility equity strategies is the fact that they have bond like risk / volatility characteristics while providing investors with an enhanced dividend yield and market returns which are more in-line with equity returns.
As long as there is still enough cheap liquidity out in the market place, we could start to see some bottom fishing over the coming days as investors start to look for cheap / undervalued stocks. In particular, investors could look toward those sectors that underperformed in 2017, such as financials, energy and consumer staples.
Richard Perry, Market Analyst, Hantec Markets:
Equity markets remain highly attuned to the threat of the increase in volatility across financial markets at the moment. Equities are considered to be a relatively higher risk asset class, so with a huge sell-off on bond markets, equity markets have also come under threat. The concern comes in the wake of the jump in US earnings growth to 2.9%, a level not seen since 2009. A leap in earnings growth has investors spooked that this will lead to a jump in inflation which could force the Federal Reserve to accelerate its tightening cycle. Markets can cope with gradual inflation but inflation running out of control can lead to significant volatility, such as what we have seen recently. The high and stretched valuation of equities markets meant that was the prime excuse to take profits.
For months, analysts have been talking about the potential for a 10% correction and at its recent nadir, the S&P 500 had corrected 9.7%. So is this just another chance to buy, or the beginning of a bigger correction? The key will be the next series of inflation numbers, with CPI on the 14th February and core PCE at the end of the month. If inflation starts to increase appreciably, longer dated bond yields could take another sharp leg higher, perhaps with the 10 year breaking through 3.0%. Subsequently, equities would come under sustained selling pressure with volatility spiking higher once more. However, if there can be a degree of stabilisation in the bond markets, then equity investors can begin to look past immediate inflation fears and then focus back on the positives of economic growth in the US, Eurozone and China.
Alistair Ryan, Senior Dealer, Frontierpay:
This afternoon’s hawkish approach from the Bank of England came as a surprise; I personally – along with many others – didn’t expect there to be any talk of a rate rise in the UK until at least the end of 2018. The services sector, which makes up around 80% of UK GDP, faltered this month and wage growth is slowly increasing but remains low at 2.4%. Both of these factors suggest a slack economy, so I expect we will see many questioning whether this is the right time for a rate rise.
If we were to see some further improvement in the economy over the coming months, then a rate rise would of course be a possibility, but whilst wage growth and inflation slowly start to correlate, I don’t think we will see any movement on the base rate.
We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!
The Dow just soared through yet another milestone, crossing 25,000 for the first time. CNN's Christine Romans explains what's driving gains.
