Market tailspin hastens the economic shock it fears

Wed Jan 20, 2016 2:10am EST
 
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By Mike Dolan

LONDON (Reuters) - One of the biggest worries about this month's sudden seizure in world markets is how puzzled investors have been left by it, and how many are just wishing it away as a temporary blip.

History suggests governments and central banks would do well to sit up and take notice, but with policy coordination at its lowest ebb in decades, a coherent response is unlikely.

With almost $6 trillion wiped off the value of global stock markets since the start of the year and another 25 percent off already low oil prices, there is a real risk investor anxiety itself will be the catalyst for a world recession.

And when market turbulence starts to crystallize the very problem investors are worried about -- what wonks call a negative feedback loop -- then these rare but dangerous spirals in confidence are notoriously difficult to halt.

By any measure, we are in historic territory.

Over the past 28 years -- or 336 months -- only 12 months have seen bigger losses in the MSCI World stock index than January 2016. Over half of those were associated with major market crises, including the Lehman Brothers bust of 2008/09, the dot.com implosion of 2001/02 and the emerging markets crash of the late 1990s.

Lowering the International Monetary Fund's 2016 world growth forecast by another 0.2 percentage points to 3.4 percent this week, IMF chief economist Maurice Obstfeld said markets were reacting 'very strongly' to bits of evidence in a volatile, risk averse climate -- but one where little fundamental had changed.

His predecessor Olivier Blanchard, now writing for Washington's Peterson Institute, sympathises with that view but warned against ignoring the seizure in markets.   Continued...

 
A woman talking on a mobile phone walks past a panel displaying the midday Hang Seng Index in Hong Kong, China January 20, 2016.  REUTERS/Bobby Yip