World markets in panic mode
World markets are in panic mode, with Australia and Japan now both officially in a "bear market", meaning they have fallen over 20 percent from their highs.
So why are markets so spooked?
Here's some of the major reasons:
THE CHINA SLOWDOWN
Investors know China is slowing. That is part of the reason global dairy prices are down and Australia's iron ore exports are suffering. But nobody knows exactly how bad the situation is in China and that is worrying investors. Markets hate uncertainty.
THE OIL PRICE PLUNGE
Crude oil has plunged to under US$30 a barrel. That is hurting oil exporters like Russia and Saudi Arabia. If prices stay at these levels some oil companies could go bust. They have borrowed lots of money.
GROWING CONCERN ABOUT BANKS
Investors are worried about the prospects for European banks. This week Germany's Deutsche Bank had to reassure investors that it was "rock solid." The nervousness about the banks has flowed through to Australia and Japan. Bank shares have been dumped this week. Lower interest rates around the world are also eating into bank profits.
NEGATIVE INTEREST RATES
Japan's 10-year bond rate is negative. That means investors will have to pay the Japanese government for the privilege of looking after their money for 10 years. Investors believe negative interest rates are a sign of how grim the outlook is for Japan. Rates are also negative in Europe. This has sparked concern that the world's central bankers do not have a firm grip on the global economy and are running out of options. Even the US Federal Reserve is now rethinking its plan for rate hikes this year. Federal Reserve chair Janet Yellen told Congress today that what happens will depend on future data. So she is hedging her bets.
There is a lot of forced selling right now because hedge fund clients want their money back. That means the fund managers are having to sell stocks, including companies they like and think will do just fine in the long run. That selling sparks even more selling. Some investors have also bought stocks with borrowed money. So when the stocks fall they are forced out of their positions.
People sometimes forget that markets are driven by psychology. They have a habit of overreacting on the upside and the downside. Stock prices are driven by what people think will happen rather than what has happened. There are people who think there are plenty of stocks that are good value now. So a recovery could happen at any time. What is uncertain is how sustainable that recovery might be.