A Wake-up Call
If you were expecting a stock market crash you might have thought that Tuesday was the trigger. It is too early to tell and we may not know that answer for several weeks. All stock markets have good days and bad days but events unfold over weeks and months and not instantly in a day or a week. 9th December 2014 may in the future become known as the Black Tuesday when stock markets throughout the world crashed but that is not obvious today.
Unexpected Triggers
Analysts’ worries that political turmoil in Greece and fright at a violent swing in the Chinese stock market combined to spark a global sell-off in equities.
Greece
There are fears that the anti-bailout Syriza party, which is ahead in the opinion polls, will win the parliamentary elections which are expected to be held as early as January after Antonis Samaras, the prime minister, called a snap presidential election. The leaders of Syriza have threatened to scrap the nation’s austerity policies and that prospect sent Greek 10-year bond yields spiking to 8.09%. (yield up, prices down)
Shore Capital analyst Gerard Lane said there were now renewed worries about “contagion” from Greece to other European nations.
China
A sharp reversal in the Chinese stock market was one of the triggers for the turmoil. The Shanghai Composite Index, which had risen more than 30% since October, swung violently before the market opening in London rising 2.4% and then closing 5.4% lower.
There were huge trading volumes after the authorities said that riskier bonds could not be used as collateral for some short-dated loans. This also hit the yuan.
The Figures
The FTSE 100 dropped 142.68 points, a 2.1% fall that was the second heaviest this year. Greece led the falls in Europe with the ASE index down 12.8%, its worst fall since 1987. Germany’s DAX lost 2.2%, France’s CAC 40 slid 2.8%, the Italian FTSE MIB was off 2.8% and the Spanish IBEX fell 3.2%. Wall Street stood firm with the Dow Jones down 0.3% and the S&P 500 unchanged on the day.
So What?
This is not the moment for a Churchillian “Action today” memo but it may be the gypsy’s warning to be prepared for worse. Consider the puzzle “Why is buying British gilts and US treasuries a flight to safety?” So-called “Safe haven” assets and a guaranteed loss built in.
Disclaimer: This material is published by Raymond James Investment Services Limited (RJIS) for information purposes only and should not be regarded as providing any specific advice. Opinions constitute our judgement of this date and are subject to change without warning.