The market bloodbath on Wednesday seems to be a 150-decibel warning that the global economy is stalling and may go into free-fall. Investors are adept at spotting global economic and financial trends – right? – and are saying that the future looks dim, so sell, sell, sell before the lights go out.
The problem with the investors' view is that it is not, apparently, shared by any sentient being toiling away in the real economy. In spite of waning growth rates in China – China is still growing, by the way – the global economy is chugging ahead. The International Monetary Fund expects world growth of 3.4 per cent this year. That's actually up from 2015.
The discrepancy points to a puzzling disconnect between what is happening in the markets and what is happening in the streets, shops and factories of the planet. Yes, there is weakness here and there, but, over all, disaster does not loom.
Investors would have you suspect otherwise. The proximate trigger for Wednesday morning's selloff in Europe – to be repeated in North America, according to the futures market – were Tuesday's remarks by U.S. Federal Reserve chair Janet Yellen, who, making an appearance in Congress, suggested that further rake hikes could be delayed. Mike van Dulken of Accendo Markets said her remarks "added to already raised anxiety about the health of the global economy to hold back risk sentiment."
Investors were then rattled by more discouraging news from the banking industry, which is shedding value at an alarming rate. In the morning, the shares of French banking giant Société Générale (SocGen) fell as much as 15 per cent after it implied that profit targets would be hard to meet. In a statement, it blamed ultralow interest rates, emerging market weakness and "unstable" financial markets, among other woes, for the waning confidence.
All other banks promptly sank, ending Tuesday's relief rally. Banca Intesa Sanpaolo, one of Italy's biggest banks, sank 6 per cent. Deutsche Bank fell by a similar amount. The Greek banks got slaughtered; they have lost about two-thirds of their value since the start of the year alone. The Stoxx 600 European banks index is down 10 per cent in one week and 28 per cent since the beginning of January.
The broader indexes sank too. By midday in Europe, the FTSE-100 index was off by more than 2 per cent, taking it to its lowest level since mid-2012, when the euro zone was on the verge of blowing up. The Eurofirst 300 by more than 3 per cent. Glencore, the commodities trader and mining company that is good proxy of the health of the commodities market, sank 5 per cent.
If the bank sell-off were not bad enough, the Swedish central bank, the Riksbank, surprised the market by cutting rates further into negative territory, this time to minus 0.5 per cent (for the main repo rate) from 0.35 per cent. The move, which followed the dip into negative rates in Japan, apparently convinced more than a few investors that the end was nigh for growth.
But wait. The Riksbank blamed the rate cut on "weakening confidence" in achieving its 2 per cent inflation target, not weakening confidence in the economy. On the contrary, it said, "The economy continues to strengthen."
The oil markets seem to have a different view. Brent crude, the international benchmark, fell again this morning, taking the price close to $30 (U.S.) a barrel. Brent has fallen every trading day since Feb. 4 and is now down 44 per cent in the last year. Conventional economics says that weakening oil demand reflects weakening economic growth. The theory ignores the glut of oil sloshing around the planet, well in excess of demand, thanks to the Saudi decision in late 2014 to open the spigots to try to choke off high-priced oil beyond OPEC.
So far, the Saudi strategy has not worked, and you can thank the economic gods for that, because the collapsed oil price is transferring hundreds of billions of dollars of wealth to oil importers from oil exporters. This is akin to a huge stimulus package for consumers and businesses in Europe, India, China, Canada and the United States, even if the burgeoning American shale-oil industry is about to take a beating. Gasoline at $2 a gallon or less is half the price it was during 2008. Hundred-buck fillups now cost $50 or less and the savings add up.
The net transfer of wealth is bound to trigger an increase in consumer spending, just wait for it. To be sure, the wild card is China. If growth rates fall sharply, or a bubble of some sort – housing, debt – bursts, then all bets are off for the global economy. But there are signs that Chinese economy is perking up again, thanks to stimulus spending and credit growth. The market turmoil may be unnerving; it is not necessarily a sign that global growth is finished. Cheap energy just might save the day.