28th September 2011
But while the scale of current risks will continue to send shockwaves along the financial system and shake investors' nerves, what exactly is driving markets? Is it primarily Europe, and what are the other factors at play?
Mindful Money asks the experts:
Gregor Hirt, Multi Asset fund manager at Schroders, says that there are 3 main driving market factors:
1. The Eurozone crisis: "This is the most difficult outcome to predict, as it depends on political decisions. This makes our life very difficult as a lack of intervention could lead to a vicious circle like the one we experienced in 2008. On the other hand a resolution (Eurobond market, indirect guarantees by core European countries) could lead to a fall in uncertainty – at least in the short term – which would then be very equity supportive.
2. The US economy: "We don't expect a double dip. Economic indicators have weakened but the Federal Reserve intervention and the latest government package should support the economy. This is one reason why we favour the US equity market for the moment, as we expect more positive than negative surprises in the fourth quarter."
3. Emerging markets and China: "We were disappointed by recent local market performance. While we were right in our expectation to see a weakening of inflation, equity markets performance did not reflect this. We still expect growth support from EM but have become a bit more cautious on this front."
Mindful Money's economist blogger Shaun Richards adds a useful summary of the array of challenges facing the economy and markets: "At this moment in time the world economy is facing severe difficulties as we see problems in places such as Greece, Ireland and Portugal which have now spread to Italy and Spain as well.
"Indeed the last weekend has shown the depth of the problems with the International Monetary Fund confessing that its resources may be inadequate in the face of this crisis. Our own country the UK is suffering from weak growth and persistent inflation that I have labelled stagflation. Just to reinforce the element of gloom even booming China is showing signs of a slowdown."
John Pattullo, Head of Retail Fixed Income at Henderson, provides another perspective on the prevailing global macro uncertainty:
"Credit markets are currently confused, cautious and illiquid given the lack of leadership and progress in global growth and the tackling of the European debt crisis."
He adds on the long-term challenges to markets: "Inflation and more critically lack of growth remain key concerns for investors and have severely affected currency and commodity markets in particular."
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