Fasten your seat belts, this ride is getting interesting. Last week the Dow Jones Industrial Average was down more than 1,000 points, notching its worst weekly performance in four years. The sell-off took the Dow Jones down more than 10% from its peak valuations, thereby constituting the first official correction in four years. One third of all S&P 500 companies are already in bear market territory, having declined more than 20% from their peaks. Scarier still, the selling intensified as the week drew to a close, with the Dow losing 530 points on Friday, after falling 350 points on Thursday. The new week is even worse, with the Dow dropping almost 1,100 points near the open today before cutting its losses significantly. However, no one should expect that this selling is over. The correction may soon morph into a full-fledged bear market if the Fed makes good on its supposed intentions to raise interest rates this year. Have no illusions, while most market observers are quick to blame the sell-off on China, this market was given life by the Fed, and the Fed is the only force that will keep it alive.
‘The forces of monetary deflation are gathering. Global liquidity is declining and central banks are not doing enough, either in the West or the East to offset the decline,’ warns CrossBorderCapital
Eurozone fears have returned with a vengeance as deepening deflation across Southern Europe and fresh turmoil in Greece set off wild moves on the European bond markets.
Yields on 10-year German Bund plummeted to an all-time low on 0.72pc on flight to safety, touching levels never seen before in any major European country in recorded history. “This is not going to stop until the European Central Bank steps up to the plate. If it does not act in the next few days, this could snowball,” said Andrew Roberts, credit chief at RBS.
Calls for action came as James Bullard, the once hawkish head of St Louis Federal Reserve, said the Fed may have to back-track on bond tapering in the US, hinting at yet further QE to fight deflationary pressures and shore up defences against a eurozone relapse.
With the annual Jackson Hole, Wyoming, Economic Policy Symposium approaching this week, economists are expressing nervousness on whether the U.S. Federal Reserve will begin to raise interest rates before inflation sets in. With the U.S. unemployment rate at 6.2 percent in July — more than a full point lower than July 2013 — and private-sector earnings up 2 percent for hourly workers, a handful of Fed officials admit worry is justified, the Wall Street Journal reported Sunday.
“The idea that the Fed might get behind the curve is a powerful one, and that’s certainly been the history of the institution. People are right to worry about that,” St. Louis Fed President James Bullard told the Journal. Continue reading