Global stocks are sliding at an alarming rate with investors panicking over sovereign debt issues and another potential global recession. Stocks made huge losses last week and Standard & Poor’s (S&P) downgrade of US debt has ensured market confidence has started this week where it finished the last.
A combination of issues has triggered the decline, said Richard Driver, analyst for Caxton FX: “Economic data out of the US in recent weeks has been abysmal and this reflects a genuine slowdown in the world’s largest economy. Then there is the US debt ceiling and the narrow avoidance of a US default, and now the story of S&P unprecedented downgrade of US debt. The fact that the US debt has never been downgraded in itself is highly uncertain, and this is being played out in the stock markets.
“The eurozone debt issue is constantly weighing on investor sentiment; the extension of the ECB’s [European Central Bank] bond-buying programme to Italy and Spain has failed to ease concerns over a structural debt crisis. We have seen an Irish, a Portuguese and two Greek bailouts in the last 18 months and the market is beginning to question where it all stops. Investors are beginning to panic, flooding out of risk and into safe haven assets.
“The US Federal Reserve’s statement could potentially add to market fears. If they are honest, the Fed will be emphasising downside risks to US growth and the potential need for a third programme of quantitative easing, which hardly seems likely to boost market confidence. Stocks are nowhere near the lows we saw in 2009 and I certainly don’t see a collapse of those proportions,” he concluded.
The dollar is benefiting regardless of the US debt downgrade, said Driver. “Much as the Japanese earthquake benefited the yen, this US debt downgrade is strengthening the greenback. This is purely because they are safe-haven assets. In the longer-term though, this downgrade story will surely takes its toll on the US dollar. Sterling has gained some genuine safe-haven appeal in the past few weeks; slow UK economic growth is far less alarming than building eurozone and US debt woes.”
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