After a few days of relative calm, the markets dropped sharply in Europe and the US, reflecting investors’ continuing concerns about the unfolding European debt crisis and the stability of the European banking system, according to one industry expert.
Erik Ristuben, chief investment officer, Russell Investments, believes this negative reaction is due to a US economic report on the drop in existing home sales, as well as the sharp decline in the Philadelphia Fed survey of US manufacturing activity.
The Russell 1000 Index was down 4.6% and the S&P 500 Index was off -4.5% for 18 August 2011.
According to Ristuben the day’s activity “reflects the same themes that have played out in global markets over the last several weeks. The fiscal issues in Europe and the US have been years in the making, and solutions will not be found overnight. In this period of uncertainty, as the situation continues to unfold, investors can expect more events that could prompt extreme market reactions – both positive and negative.”
There is also major concern about the sovereign debt issue in Europe and its flow on effects into the banking system. “With a day to process the outcome of the meeting between French president Nicolas Sarkozy and German chancellor Angela Merkel, the market clearly was looking for more. In addition to the stock market sell-off, we saw a strong rally in US Treasury bonds, and the US dollar strengthened against the euro in a likely sign that we continue to see capital flowing out of Europe and into the relative safety of the US.”
Ristuben concluded: “This flight of capital may be one of the most discouraging signs to core European leaders and may significantly contribute to their incentive to act in their own self-interest and take the necessary steps to fundamentally address the issues facing their markets.”
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