Bears beat bulls – are markets in downward spiral?

 Bull and bear statues are pictured outside Frankfurt’s stock exchange. The bears’ growl now dominates the financial markets, scaring away the bulls, as investors turn tail and run in fear as global growth prospects evaporate.

AFP/Paris

The bears’ growl now dominates the financial markets, scaring away the bulls, as investors turn tail and run in fear as global growth prospects evaporate.

Markets are often described as a confrontation between two animals, the bull and the bear. The first is an optimistic and aggressive animal, while the second is defensive and pessimistic.

A bullish market is optimistic and investors aggressively chase opportunity and profit, while in a bearish market investors are pessimistic and seek to limit their losses.

Once direction has changed, they tend to act as a herd.

“I’m afraid this might be the beginning of a bear market that could last for some period of time,” said CNBC commentator Dennis Gartman and who publishes his own financial newsletter.

“You have to remember: bears don’t eat, only bulls in the market enjoy the upside,” he added. Markets tumbled on Wednesday and fell sharply again on Thursday. Markets have also seen sharp swings in prices in recent weeks.

Analysts at CM-CIC see a “paradigm shift” taking place on the market.

Recent weeks have seen one international organisation after another slash their global growth forecasts.

Yet the bulls kept pushing stock prices higher until recent days, when the glum global outlook and uncertainty put the bears in charge.

“The turmoil that hit the markets yesterday ... has addressed some of the disconnect between economic fundamentals and asset prices that have been worrying many economists for some time,” said analyst Jane Foley at Rabobank.

Analysts at CM-CIC said plunge on the stock and bond markets showed investors “had become aware of the gloomy global growth outlook combined with factors including concerns over the Ebola pandemic and the risk of backsliding in Greece.”

Trader Lee Mumford at Spreadex said “world growth concerns continue to rattle global markets, sending investors to the sidelines and dumping as much risk as possible.”

IMF chief Christine Lagarde recently summed up the global growth outlook in one word: mediocre. “There is a risk that the world will be stuck with mediocre growth for a while,” she said at the beginning of October.

And each of the motors of global growth has begun to run rough. The eurozone, haunted by the spectre of deflation, is close to stagnation. China’s economy has slowed and the recovery in the US has hit some fits and starts.

According to bond analyst Rene Defossez, the announcement on Wednesday that US retail sales dropped 0.3% in September “was the straw that broke the camel’s back”.

The market likes terms linked to animal behaviour.

Analysts at Germany’s DZ Bank also pointed to increased volatility on the markets.

Now, “the markets will remain very nervous and alert to the release of each figure,” said Defossez.

The plunge in the markets heaps more pressure on central banks, which have been largely responsible for keeping the global economy from going off the rails in recent years through easy money policies.

The US Federal Reserve has wound down its stimulus and is looking to increase interest rates as the US economic recovery takes hold, but “as the monetary morphine has started to wear off the patient has come to realise that a lot of the old problems still remain,” said CMC Markets UK analyst Michael Hewson.

European Central Bank chief Mario Draghi calmed a storm in financial markets in 2012 by promising that the ECB would do “whatever it takes” to save the euro, and recently he announced additional measures to support the eurozone economy. But he also insists that growth ball is very much a matter for national governments and policy reforms.

Analysts at Aurel believe the market rout this week is just “a foretaste of a financial crisis”.

Others are more optimistic, like Alexandre Baradez at IG, who said the market slump does not “call into question the medium-term outlook of markets for a recovery in the eurozone economy.”

But Richard Jeffrey, chief investment officer at Cazenove Capital Management in London, wondered whether the current bout of market turbulence was “the echoes of the previous crisis or the start of something more sinister?”