Wall Street slump taints stock revival in Europe
GLOBAL stock markets suffered a volatile day of trading after an American rally fizzled out, leaving fragile investors still reeling from the after-effects of “Black Monday”.
US equities saw a remarkable reversal in their fortunes, wiping away their gains in a dramatic bout of late selling to finish in the red for the sixth consecutive session.
The S&P 500 - which has officially entered correction territory for the first time in three years - closed down 1.35pc, wiping out an earlier rise of 3pc. A 440point gain for the Dow Jones Industrial Average also evaporated, with the index closing down 204.91 points, or 1.26pc.
Markets had initially rallied following stimulative action from the Chinese central bank to cut interest rates in a bid to stem the market rout and ease concerns about its slowing economy.
“At this stage it is foolhardy to try to gauge whether we are at the ‘end of the beginning’ or the ‘beginning of the end’ where this sell-off is concerned”, said Chris Beauchamp at IG.
Sharp falls in US markets came after investors had piled back into European equities, which regained hundreds of billions of euros, reversing losses incurred on the worst day of trading since the depth of the financial crisis.
The FTSE 100 ended the day 3.1pc higher, regaining 183 points, its best one-day performance since 2011. Britain’s benchmark index bounced back after a 10-day run of consecutive losses, clawing back much of the 280-point wipeout earlier in the week.
Germany’s DAX and Paris’s CAC 40 ended the day up 5pc and 4.2pc respectively, while the EuroStoxx 50 group of shares gained 4.7pc.
Investors’ risk appetite was sparked after the US and Chinese central banks allayed investors’ fears about the state of their respective economies. In Beijing, the People’s Bank of China (PBOC) moved to simultaneously cut interest rates and ease lending rules for banks.
The intervention came after China’s main stock index extended its August rout, bleeding another 7.6pc in yesterday’s trading. The Shanghai composite closed below the 3,000 mark for the first time since late 2014, and has now shed 42pc of its value since its May peak. The index was the biggest faller in Asia. Japan’s Nikkei plunged another 4pc, while Hong Kong’s Hang Seng recovered from its steepest decline in over 30 years on Monday, to close up 0.75pc.
Phew! There’s a relief. After weeks of botched decision making and dithering, the Chinese authorities have finally ridden, Alan Greenspanlike, to the rescue. They’ve cut the official interest rate, and they’ve added liquidity to markets by reducing the reserve requirements for banks. All that’s required now is for Janet Yellen, chair of the US Federal Reserve, to row in behind these actions, signal that a US rate rise is for the moment off the table, and the crisis – such as it was – will be over before it even properly began.
That, at least, is one way of looking at it. Yet the more correct way is as a timely reminder that all is still far from well in the global economy.
For the moment, the focus is on China, and the difficulties it is having in switching from past engines of growth – exports and capital investment – to a more western and sustainable form of economic expansion more solidly based on domestic consumption.
Look further afield, however, and you find that almost everywhere is economically unhappy in its own way. For much of the rest of the emerging markets economy, it’s the end of the Chinese dependent commodities boom, leaving many resource dependent countries scratching around to service mountainous foreign currency debts. In Japan - whose economy, like China’s, is similarly dependent on investment and exports - Abenomics is also struggling to counter the effects of the Chinese slowdown.
Greece may have achieved a stay of execution, but Europe as a whole remains firmly stuck in a state of political and economic crisis of almost biblical proportions, with no sign of the shift in political attitudes necessary to solve it.
The main Anglo Saxon economies are at least growing, but in both Britain and the US, these are manufactured recoveries heavily dependent on rising consumption and record low interest rates. Britain’s near 6pc current account deficit is testament to just how beholden the UK has become to foreign capital for its expenditures.
When the former Chinese leader Wen Jiabao, fired the starting gun on the present era of market based reform by describing the Chinese growth story as “unstable, unbalanced, uncoordinated and ultimately unsustainable”, he might have been talking about the global economy as a whole. The Western financial crisis has done little to correct this state of instability.
What we instead see is the so-called “Greenspanput” - the belief in financial markets that whenever the going gets tough, the Federal Reserve will come riding to the rescue – played out on a global scale. At the height of his power, Mr Greenspan was credited with almost god like powers. Today, his legacy is viewed far less kindly; by persistently underwriting markets, and thereby interfereing with the rhythm of the business cycle, he is widely seen as a major part of the mischief leading up to the banking crisis.
This hasn’t stopped policymakers applying the same therapy to its aftermath. After a fashion, it’s worked. The economies that have done best are those that have applied fiscal and monetary stimulus most liberally. The biggest practitioner has been China. Unwilling to countenance any setback to stellar rates of growth, Beijing unleashed a fiscal and credit expansion of unprecedented proportions. This has bought growth and jobs, but it has also reinforced preexisting imbalances in the Chinese economy.
As it happens, exports have not really been part of the Chinese growth story for a long time now. Rather, the main driver has been debtfuelled investment, particularly property, where the Field of Dreams delusion of “build and they will come” has been pursued to an extreme degree. The resulting credit, housing and construction booms have since come home to roost with a vengeance. Industries that relied heavily on the construction bubble – from building materials to consumer durables such as washing machines – have fallen off a cliff.
Consumer spending has admittedly been rising strongly to meet this contraction in capital investment. Service industries too, if you can believe the official data, have been growing strongly, both in nominal terms and as a proportion of GDP, but not by enough fully to compensate for the falloff in investment.
Like some kind of circus act, the idea was to jump from one horse to another. Unfortunately, investment has been cooling far more rapidly than the consumer economy can grow. Officially, China grew by 7pc on an annualised basis in the first half, bang on target. Many Western observers believe the true figure to be 4pc or less, which for China is close to stall speed.
If nothing else, the events of the last few weeks have served to highlight what should have been a self-evident truth; that China’s authoritarian form of state directed capitalism has not after all succeeded in suspending the usual rules of economics. You’d be amazed how many otherwise rational and well-informed western observers came to believe this nonsense, eulogising the Chinese economic model as in some way superior to its Western counterparts. It is to be hoped that the scales have now fully fallen from everyone’s eyes.
None of this is to represent the Anglo-Saxon model in its current form as economically more sustainable. America and Britain are in many respects the reverse image of China, with far too little investment in the economic mix, and too much debt fuelled consumption. Both models, it would seem, have through their love of debt made themselves prone to financial and economic crisis.
The Chinese authorities may succeed in staving off the moment of truth a while longer yet, but the summer storm in stock markets has very much sounded the warning bell.
In property, the ‘Field of Dreams’ delusion has been pursued to extreme degrees