Investors fear global economy is running out of engines as markets fall around the world
A broker looks at his screens at the stock exchange in Frankfurt, Germany today. The stock index DAX fell under 8500 points.
The global economy faces its biggest test of confidence since the European sovereign debt crisis as investors fear it’s running out of engines.
Japan and the euro area are throwing up fresh signs of weakness by the day and emerging markets such as China are dragging instead of driving growth. The sense of tumult is being exacerbated by war in the Middle East, the standoff in Ukraine, street protests in Hong Kong and the spread of Ebola to Dallas.
The worry is that five years since the world limped out of recession, central banks have virtually exhausted their stimulus arsenals if inflation and activity keeps fading. That leaves the hopes of financial markets riding on the US to resume its historical role as a locomotive robust enough to pull up demand elsewhere.
“The global economy and the markets have a history of traumatic economic events,” said Paul Mortimer-Lee, chief economist for North America at BNP Paribas SA in New York. “Psychologically and physically they have not recovered fully and are anxious about a relapse.”
The doubts remained evident across financial markets today. European stocks fell for an eighth day in the longest rout since 2003, oil fell toward $80 a barrel and Treasuries rose. Bonds from Greece to Spain slid while the dollar strengthened.
Avoiding commodities
A Bank of America Corp. survey of fund managers this week showed the lowest optimism in the outlooks for economic growth and inflation in two years, pushing them to increase their cash balances and avoid commodities.
“Investors have huge questions about the world right now,” said David Kotok, chairman and chief investment officer at Sarasota, Florida-based Cumberland Advisors Inc. The latest catalyst for concern was yesterday’s news that U.S. retail sales dropped 0.3 per cent in September and wholesale prices unexpectedly fell for the first time in a year. That added to the drumbeat of disappointing data from elsewhere, which this week alone included the weakest German investor confidence in two years and Chinese factory-gate prices dropping for a record-tying 31st month. Japanese industrial production tumbled 3.3 percent from a year ago, and U.K. inflation unexpectedly plunged to its lowest in five years. Prices in Israel and Sweden are even falling in an indication of deflation, while euro-area inflation was today confirmed at 0.3 percent in September, the weakest in almost five years. European Epicenter The epicenter of the economic worries is the euro area, where European Central Bank President Mario Draghi is trying to tackle the weakest inflation in almost five years as investors bet it will deteriorate further amid signs powerhouse Germany is now faltering. Having pulled the euro-area economy out of its debt panic in 2012, Draghi has sought to boost prices by cutting interest rates to record lows, issuing cheap loans to banks and laying the groundwork to begin buying private-sector assets this month. That leaves purchases of government debt as the last option. While Draghi says he is open to quantitative easing if necessary, it would run into opposition from Germany. Governments throughout the bloc have yet to deliver the economic reforms and easier fiscal policy he would prefer to see first. “Europe has now entered a more dangerous phase in their crisis,” said Scott Brown, chief economist at Raymond James and Associates Inc. in St. Petersburg, Florida. “They’ve got to do quantitative easing. They don’t have any choice because that’s the only game in town.”