November 4, 2011
What do you get if you cross a bull with a bear? The punchline was visible in this week’s markets but it wasn’t very funny for investors. The wild swings were the biggest since the recovery in stocks began, with three-month volatility in European shares back to levels last seen in March 2009. The volatility of major currencies hit its highest since June 2009, according to a BNP Paribas measure. And there was no escape: prices of almost everything moved together, with HSBC calculating that correlations between assets and between individual shares reached new highs.
The problem was that both the bulls and the bears appeared to be right.
Optimists have argued for months that the US summer slump would not turn into recession. Important economic data seemed to back their case.
True, some closely watched data were below expectations, including the purchasing managers’ index – a timely indicator of economic activity – and job creation. But below the surface both suggested the US was not being dragged down by Europe. The PMI numbers disappointed due to falling inventories, while new orders picked up, suggesting better months ahead. October’s poor payrolls were offset by hefty revisions to earlier figures, suggesting much of the summer gloom was based on a mistake.
At the same time, pessimists were given the political chaos they had been expecting in southern Europe – gift wrapped and delivered in style by George Papandreou and Silvio Berlusconi.
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