Stock prices and bond yields fell yesterday over fears that another economic slowdown is just around the corner.
The Dow Jones Industrial Average (DWIA) dropped 2.5% to below 10,000, the FTSE 100 fell 3.1% to a new low for the year of 4,914 and US ten year Treasury note yields ended up below 3%, which is their lowest level since early 2009 and is a sign of people looking to limit risk.
The fears stem from slumping US consumer confidence, the downward revision of a Chinese economic indicator and continuing concern over the state of European banks. Spain asking the European Central Bank not to close an emergency funding scheme did not help. There are also worries that austerity packages around the world will end up hindering any recovery.
In a double whammy in the US the Conference Board (a non-profit research group) has reported that not only did consumer confidence drop from 62.7 to 52.9 in June but also that Chinese growth was not as great as first thought. There was also recent bad news in the shape of another housing sector downturn just as the government is pulling its support.
In Europe the ECB is trying to gradually wean banks off of its support. But many banks need to renegotiate finance and may not get the line of credit needed without that support. The stress testing of banks has also been extended with the intention of publishing the results on a bank by bank basis, which may worry one or two of them.
The Guardian puts the markets on a ‘cliff edge’ and in the Telegraph RBS strategist Andrew Roberts said he detected a ‘Minsky moment’ approaching (from Hyman Minsky – when investors start to panic). He told the Telegraph "We are seeing a snowball effect of negative news, … It's all rather messy out there. In the last few days there has been a tangible shift from complacency to a realisation that maybe things aren't looking all that good. This is almost identical to two years ago – complacency giving way to the abundant risks out here."