Gripped by a cold market sweat

It's no mystery why markets around the world have been caught by fear – there's bad news everywhere from Europe to the US to commodity prices, and the nervousness only leads to more negativity.

Last night fear gripped the world. And for good reason. As I pointed out yesterday, everywhere you look there is bad news – from Spanish bonds, to the US economy to copper prices, which last night hit a three-month low (The women who make markets, April 10). The massive money-printing exercises by the US and European central banks are starting to wear thin.

The next few weeks will be important for global stockmarkets, which desperately need the continuation of the US up-thrust which has been inspiring the world, although it was driven by money printing and the big rise in some wonderful American stocks like Apple. After a quiet start, for most of the night US stocks fell and the pace quickened as the final bell neared and the losses topped the 1.65 per cent mark on the Dow.

Significantly, the VIX fear factor index, which had fallen from around 38 last year to 14, jumped to 20. American nervousness will make it hard to resume the up-trend because as fear increases the tough news just keeps coming. We are all used to bad news from Europe and it is becoming clear that while the process of printing money has overcome the immediate European banking problems the longer-term high unemployment and government contractions are squeezing the life out of the European continent. Fear of debt haircuts are sending bond rates higher in countries like Spain.

In due course something will have to give. In the US the situation is not as serious but once again jobs are not being created because the money stimulus was not well directed and too much ended up being used to foster global commodity speculation as investment banks played games with cheap money rather than creating jobs.

The American jobs market is being held up by people simply not looking for work. America is not likely to collapse but the bad employment report underlined the deeper problems. My bullish friends tell me the latest market fall is merely a correction but I think that the view that the US has a long hard grind looks more accurate than a wave of quick economic recovery. China is holding its ground but as the Reserve Bank warned it too is not going to sparkle in the next twelve months, particularly given what is happening in the US and Europe.

Back in Australia we of course have one of the best pieces of good global news – a mining investment boom. But that mining boom is starting to hit a few snags and looks like it has peaked. BHP is looking hard to cutting back its expansion because the immediate outlook is less optimistic than it looked six months ago. One project likely to be mothballed is its Queensland coal plan because of the militant attitude of the unions.

The great coal gas projects are proceeding but some are looking short of gas. The mining investment boom is still going to be big but maybe not as big as originally thought. Meanwhile, in the non-mining economy the game is getting tough in substantial areas. You can see that in the nervousness of people in the housing market. According to Westpac’s Bill Evans unemployment would be 5.75 per cent but for the fact that more people are not seeking work.

We have seen in the stockmarket that there is considerable nervousness. Unless calmed it can have nasty side effects in a climate where bad news is overshadowing good.


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