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Equity markets get jitters

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Saturday, Aug. 9, 2014, 3:15 p.m.
 

A rebounding economy, increased corporate earnings and satisfactory job creation have failed to calm jitters that pushed the stock market down from recent highs.

The failure of two mega-merger deals — Twenty-First Century Fox's bid for Time Warner and Sprint's bid for T-Mobile — likely shares some blame for the market's weakness.

Despite healthy quarterly earnings releases and signs of a resilient economy, investors' psyche is being battered by global geopolitical events.

The latest punch was U.S. military action in Iraq. The development adds to other global events that are weighing on the minds of investors. Top of the list are conflicts in the Ukraine and the Middle East.

The Ukraine situation has opened deep fissures in the relationship between Russia and the West that brings memories of the Cold War. The crisis has escalated into tit-for-tat economic sanctions. But investors are more worried about a military escalation.

Fears eased a bit Friday on news reports that Russia had ended military exercises near Ukraine. The Dow Jones industrial average soared 185.66 points to 16,553, reversing losses for the week, but was 3 percent from its recent high.

European stock markets have lost ground, too, and money is flowing as flight capital to the United States driving up the dollar and Treasury bonds.

The rise in U.S. equity markets to all-time highs was fueled to some degree by the Federal Reserve's easy money policies. The Fed provided a mountain of cheap liquidity by holding interest rates near zero.

The zero interest rate policy created a dearth of alternative investment opportunities. Investors were faced with negative real rates of return in bank deposits and high quality bonds. Fed policies increased the risk in bonds and forced investors to chase equity prices ever higher. Retail investors remained nervous, hoarding cash in banks despite negative real returns.

News that the economy rebounded at a strong annual rate of 4 percent in the second quarter and of monthly job growth of over 200,000 should have sent equities to highs. But equity markets lost ground.

One reason was that signs of an improving economy might prompt the Fed to raise interest rates sooner than expected. But some influential advisers feel the Fed cannot afford that for the foreseeable future. So what took markets lower?

With the sole exception of the OPEC oil embargo of 1973, stock markets, after an initial drop, have shrugged off local and regional wars since WWII. However, the worsening situation in Ukraine threatens a return to the Cold War — and even a major war.

Europe is dependent heavily on Russian energy supplies. Further, the region transacts 10 times the volume of trade with Russia than does America. Europe, with Italy in recession, faces the significant cost of sanctions.

Splits within NATO may encourage Russia to become militarily aggressive in the Ukraine. Furthermore, if successful in the Ukraine, Russia may dare even to recover parts of its lost empire in Eastern Europe, risking a major war.

Likely, the risks of major trade or military war underlie the market declines despite apparently improved U.S. economics.

John Browne, a former member of Britain's Parliament, is a financial and economics columnist for Trib Total Media. Contact him at johnbrowne70@yahoo.com.

 

 
 


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