Double dip?
Following the considerable stock market gains of 2009 - after the most apocalyptic predictions for the global economy proved unfounded - markets have gone into reverse in the past few weeks as the collateral damage of the recession become apparent.
Things were catalysed a couple of weeks ago when US president Barack Obama announced plans to split-up the biggest US banks and it became clear that China would need to take steps to slow down its over-heating economy. Yesterday, it was US unemployment figures and fears about a growing European sovereign debt problem causing the jitters.
The latest US unemployment report is due out later today, but recent figures haven't painted a very rosy picture. This has created a general climate of pessimism, which was reflected in the US stock markets yesterday.
Probably a bigger factor in encouraging risk-aversion, however, has been fears about the ability of some of the EU's poorer countries to service their national debt. Greece has been getting most of the headlines recently, but now there are fears about the ability of Portugal and Spain to pay their bills too, and Spain is currently the fourth largest European economy.
Those three countries, together with Ireland, are sometimes grouped together in the unflattering acronym PIGS. They, like the UK, have had to borrow extensively in an attempt to stimulate their domestic economies and minimise the effects of the global recession. There are now concerns that the political will to implement the severe reductions in public spending required to reduce this debt is lacking.
A worst case scenario would involve one of those countries defaulting on its debt and this creating a domino-effect of risk-aversion, credit rating downgrades and a broad market retreat. The pressure is ultimately on the EU to help these economies, but it remains to be seen whether its bloated bureaucracy is capable of implementing radical measures in timely fashion.
Pretty much all stock markets were down yesterday and the FTSE 100 is down 1.5 percent today. However, at time of writing, it seemed to have stabilised, probably helped by a surprise quarter of profit from BA.
UPDATE - 17:30 5 February 2009
The US unemployment figures turned out to be better than expected and that has served to cushion falls in US markets. The Dow was still below 10,000 at time of writing, however.
