The Cable

Is Wednesday’s Bear Market a Sign of Global Slowdown or a Simple Correction?

A string of bad economic news combined with new concerns about the spread of the Ebola virus rocked world markets Wednesday, Oct. 15, leading to one of the biggest drop in the Dow Jones industrial average in years and fears that it could be a sign of a global slowdown. Bad news from around the ...

Photo by Spencer Platt/Getty Images News
Photo by Spencer Platt/Getty Images News

A string of bad economic news combined with new concerns about the spread of the Ebola virus rocked world markets Wednesday, Oct. 15, leading to one of the biggest drop in the Dow Jones industrial average in years and fears that it could be a sign of a global slowdown.

Bad news from around the world conspired to cause the sell-off. (As of 2:15 p.m. U.S. Eastern time, the Dow was in deflation, a condition where prices rise while the value of currencies drop.)

The continued standoff between Berlin and the rest of the European Union is also testing markets. Growth across the eurozone — including Germany, the EU’s economic engine, which cut its 2014 growth projections to 1.2 percent from 1.8 percent — is stagnant, and European lawmakers are calling on the European Central Bank to do more to stimulate growth.

However, German Chancellor Angela Merkel and other officials in Berlin refuse to abandon austerity or boost spending in an effort to revive the German economy. They also oppose any new action by the European Central Bank.

Meanwhile, oil prices are tanking because of oversupply. Prices now stand at a three-year low.

"Crude oil markets have moved rapidly into surplus, not because of the growth in new production from the U.S. and other[s], but equally importantly because of the rapid collapse of demand," Citigroup’s Ed Morse said in a note to investors. "As a result, there is an emerging surplus that should weigh heavily on prices through next year."

According to an equity trader in Chicago and a mutual fund analyst in Pittsburgh, news of the new Ebola case in the United States, which is hammering transportation stocks, along with concerns about the Islamic State, also known as ISIS, further spooked markets.

"I think it has to do with everything really; weak data hurt today.… This is the first real capitulation that I’ve seen," the equity trader said in an email. "Europe has been bad, both the usual suspects — Greece is really bad now, along with Spain, Italy — but also Germany had some bad data. I think Ebola and ISIS are adding fuel."

Wednesday’s sell-off could be a sign of weakness to come. Yields on 10-year American bonds, a long-term indicator of economic health, dropped to 1.86 percent, the lowest level in six months (the lower the yield, the lower the long-term prospect for the economy).

"It’s insane. Treasuries are soaring as we are in a total risk[-averse] environment," the mutual fund analyst said in an email. "I feel like a deer in headlights."

That sentiment echoes comments by Andrew Wilkinson, chief market analyst at Interactive Brokers, who said in a morning note that markets are in a "bad, bad mood." But Steven Wieting, Citi Private Bank’s global chief strategist, told Bloomberg News that the sell-off was a return to normalcy after a long bull-market run.

"We have to realize that markets in the past three years have had half the normal volatility," he said. When asked whether we’re returning to a normal market environment, he said, "I think we are."

The mutual fund analyst noted that it’s impossible to predict what all these global crises will mean for the global economy.

There is "not a comprehensive framework to explain this market. These type of moves are more unprecedented and defy the theoretical constructs for analyzing them," the analyst said. "There are no textbook models for Ebola plus low oil prices plus ISIS plus extremely low global rates. The world is bigger and more complex than ever imagined."

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