Stock market crash wakes up old fears
This is only a healthy correction, analysts calm down
9 February, 2018
World markets showed last week that they were still traumatised by the events of 2008, the worst financial crisis since the 1930s. The dramatic fall in stock prices on Wall Street, which spooked equity markets around the world on Tuesday, made investors nervous that this could be the start of a new stock market crash. But analysts calmed the spirits saying that the event was rather healthy.
Last Monday, New York's Dow Jones Industrial Average saw its steepest ever one-day point drop, shedding a total of 1,175.20 points, or a hefty 4.6% in value. That has triggered panic in Asia and Europe, where stock prices fell sharply next day.
“We haven't seen swings of such magnitude for a long time and in that sense, it's traumatic,” said Jean-Francois Robin, bond strategist at Natixis. “There is no reason to panic. Corporate earnings are on the up. Business indices are at their highest levels in decades.” At the current juncture, a stock market correction is “actually rather healthy,” Robin argued.
The downturn began on Friday when bright US non-farm payrolls data sparked fears that inflation will surge this year, and that the Fed will be forced to raise borrowing costs more quickly than anticipated. At the same time, US Treasury yields shot to four-year peaks, as bonds become more attractive for investors than stocks. Behind all this were concerns that central banks could start to wind down their ultra-expansive monetary policy measures more quickly than anticipated.
“Protected by central banks' generosity, investors have got used to low borrowing rates, low inflation and an absence of volatility,” said Jean-Louis Mourier, economist at Aurel BGC.
“We can say it's a correction, but I don't believe we're witnessing large-scale panic,” said Jean-Laurent Bonnafe, head of BNP Paribas at the bank's annual news conference. For many analysts, the current bout of selling fever is primarily a matter of “market psychology”, said Christopher Dembik, chief economist at Saxo Banque. “Markets sometimes have a tendency to create their own reality,” said Vincent Juvyns, strategist at JPMorgan AM. The pick-up in inflation and the rise in bond yields were already making investors jumpy, and so the US jobs data on Friday could have just been a convenient excuse to start selling, he said.
After three days of frantic trading, stock markets recovered ground later on Wednesday.