Eurozone worries and market volatility
I’m in England right now, spending more time going on walks and eating oysters than trying to keep a close eye on financial markets. But the one thing that has been screaming out at me, from the headlines on BBC radio to the front page of the Independent, is the idea that the fall in global markets is a direct consequence of a deepening crisis in the eurozone, and fears that default risk might be spreading from Greece to Portugal and elsewhere.
This is all par for the course when it comes to financial journalism, but that doesn’t make it any less annoying. The fact is that the fiscal status of the Eurozone countries has not changed, and that if people are more worried about such things than they were a few weeks ago, that’s because of the action in the markets, as opposed to the action in the markets being caused by some kind of spontaneous uptick in generalized concern.
It’s pretty clear which way the causality is running: markets fall, and journalists, who believe that there’s always a reason for such things, look around to see what people are talking about. When it turns out that they’re talking about the likes of Greece and Portugal, they have their headlines: “markets fall on eurozone fears” or the like. But if the markets had gone up instead, and people had been having the same conversation, you’d never see a headline saying “markets rise on eurozone fears”.
So it’s truly wonderful to see my very own Reuters come out with a much more sensible piece of analysis on Friday. Here’s Jeremy Gaunt and Natsuko Waki:
Data held by State Street contains no obvious evidence of an institutional exit from euro zone assets; the flows which are occurring appear to be no more defensive than those being seen elsewhere during a period of risk aversion for financial markets around the world…
Recent falls by the euro may be unrelated to worries that worsening fiscal problems in the euro zone’s weaker members could eventually drive them out of the zone.
The euro has fallen about 4.5 percent against the dollar this year. Euro zone stocks have been battered, with the MSCI Europe exUK index down 6.9 percent for the year.
But many of the moves made by big investors have fit in with other trends. MSCI’s all-country world index is down 6.7 percent.
The key here is to stop looking at day-to-day movements, especially in stock markets: they mean nothing. And if you do look at them, whatever you do don’t try to explain them. Stocks are cheaper now than they were last week: if you’re thinking of buying stocks that’s probably a good thing, and if you’re thinking of selling stocks that’s probably a bad thing. End of story. And as for the eurozone, it has big problems today, and it had big problems last year, and it will have big problems next year. Sometimes there’s a lot of chatter about those problems. And sometimes markets move. But let’s not pretend that there’s some strong correlation between the two.