Stock markets have fallen too far, say analysts

Stock markets fell sharply on Wednesday, as panic spread like wildfire. There wasn’t any single event that triggered the fall.

Many commentators cited two main factors: the fact that new cases of people infected with Ebola were discovered and general worries about the global economy.

But, as many analysts point out, none of these factors is really news.

There is indeed a link between the rise of Ebola and an increase in the indicator of market fear, the volatility index VIX, as analysts at Societe Generale point out.

But, as market volatility is difficult to separate from other causes, it is hard to say how much it is actually correlated with the increased number of Ebola cases.

Stock markets volatility

Stock markets volatility and the Ebola virus. Source: Societe Generale

What can be said with certainty is that airlines were clearly hit by the Ebola newsflow, as there is a danger that travel restrictions will be put in place to stop the spreading of the virus.

Regarding the general worries about a slowdown in the global economy, analysts at RBS point out that “very little has changed from a fundamental perspective.”

If anything, the theme of disinflation – seen most recently in UK inflation data, which came lower than expected for September – serves to push expectations of rate hikes by central bank further in the future. This should be positive for stock markets.

The RBS analysts have pushed their expectations that the Bank of England will raise interest rates by a quarter of a percentage point to August next year from a previous forecast of February.

Societe Generale analysts calculate a Newsflow Indicator, which is the sum of the number of news articles about economic strength as a percentage of the total articles on economic issues.

It currently stands somewhere around 57%. If it falls below 50%, this indicator highlights signs of recession. When the indicator is above 50%, it means the economy is expanding, because the number of positive news items exceeds that of negative ones.

Calculated for the eurozone periphery, the indicator is below 50% for Italy and Greece, and above it for Spain and Ireland.

For the BRIC emerging markets, the newsflow indicator is below 50% for Brazil and Russia and above for India and China.

The usually bearish think-tank Capital Economics put out a note pointing out that a lot of the bad news that the stock markets price in “does not stand up to close scrutiny.”

They note that the downgrade of the global growth forecast by the International Monetary Fund (IMF) was “much less significant than many headlines suggested” and that in any case, “the IMF has no crystal ball.”

In the same vein, the fall in commodity and equity prices is “not convincing evidence that the world economy is falling off a cliff,” according to Capital Economics.

The note points out that cheaper oil is a “net positive for the world economy, and should help to kick-start a recovery,” while purchasing managers’ indices continue to indicate “fairly strong growth” for the third quarter.

Stock markets got hammered on Wednesday, but on Thursday European shares opened higher. It remains to be seen if they confirm one analyst’s view that the correction would be brief.

@AntoniaOprita

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