Was the Decline in the World’s Financial Markets Expected?

Steven Petrov                                                                                                                                                                                                                                                                   The Paw Print

After a 5-year continuous increase, creating a strong uptrend movement on the world’s financial markets, the thing that many analysts anticipated was a 10% correction at some point in the near future actually happened throughout the last 20 days.

To put it in more simple terms – all of the leading indexes worldwide (S&P 500, DOW 30, Russel 2000, DAX 30, FTSE, CAC 40, NIKKEI 225 etc.) lost around 10% of its value over the last 20 days. The European markets experienced the most severe decline over this period, which were further given “fuel” by the critiques by the German Finance Minister, Wolfgang Schäuble, towards the ideas of Mario Draghi, regarding the potential economic stimulus from the ECB and expressed his doubts that his words will actually be followed up by actions.

The president of the European Central bank, Draghi, has expressed on several occasion his intentions to introduce to the EU a quantitative easing program. This program has been witnessing a success in supporting the US economy in recent years and is basically consisting of massive purchasing of financial assets, which puts more money into the financial systems and ideally supports the economy. Another major reason that has played an important part for the huge declines in the European markets is the increased fears of deflation.

While it may seem positive at first glance, that when the prices of goods drop it should benefit the consumer and the economy, this actually has a negative impact and is proportionally related to the strength of the economy. There is a certain level of a so-called “healthy inflation” (around 2%), which is an important determinant of the general strength of a country’s economy. However, as we mentioned already, Europe was not the only market that was severely hit by this bad and really complex mix of news, economic reports, Ebola fears, and Oil sell-off that we have been seeing throughout the last month. The US markets also experienced some of the most volatile weeks in the last 3-4 years, when the CBOE Volatile Index reached unseen highs since 2011 (31-32) during the week of October 13^th to October 17^th. The VIX index represents investors’ current sentiment and fear levels of mostly “downward volatility.”

The most volatile day so far was Wednesday October 15^th, when DOWJIA dropped around 480 points for a few hours, caused by the poor economic report of US Retail Sales that came out below the estimates, as well as another Ebola breakout and poor performance of the European market during its trading session. However, by the end of the week (Thursday and Friday) the markets seemed to have found their footing and are now awaiting the most important Q3 2014 Earnings report week, October 20^th – October 25^th.

The positive results that many analysts expect by the majority of the big companies that will report their earnings results for Q3 like Apple, IBM, Coca-Cola, McDonald’s and others could help the market regain its strength and continue its long-time and strong uptrend movement, closing the 2014 year at much higher levels than what is it trading at the current moment.