There is a lot of excited talk and explanation about what caused the sudden plunge in world markets yesterday afternoon. I have heard several reports now assuring people that the sell-off was an input error and “all a big misunderstanding.” Make no mistake, world markets are selling off heavily for many good reasons.
It may well be that there was a technical problem around 2:30pm yesterday that triggered a sudden drop, but markets were selling off heavily well before that happened and have been breaking down technically for the past several months. Do NOT listen to the long always robots out there assuring everyone that the correction is over and it was all a big mistake: “nothing to look at here folks, move along, move along.” Sure.
World asset prices have been heavily over-valued for the past 6 months and have become wildly disconnected from the realistic growth profile of the global economy over the next year and possibly further. The next phase of the on-going credit crisis is rightly taking world attention at the moment and it is called Sovereign debt. It is much bigger than the US banking crisis that rocked the world in 2008 and it will be hard for any risk assets to decouple from this re-pricing phase. (The US dollar and long bonds have broken out though as the risk trades come in for shelter.) Expect these issues to persist for months not days. Restrict your risk accordingly.
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http://seekingalpha.com/article/203717-the-day-the-system-broke-again
http://seekingalpha.com/article/203702-business-as-usual-on-fat-finger-friday
I agree if it wasn't a fat finger it would have been something else. Like you say we are overdue for a correction, and the actual rollover in the markets began a few weeks ago illustrated by the big down days on big volume which exceeded the up days on weaker volume.
“Central banks around the world joined the coordinated effort to prop up the euro and repel speculative attacks against Europe's weakest countries. The European Central Bank used what analysts called its “nuclear option” – buying public and private debt to shore up liquidity in “dysfunctional” markets and lower borrowing costs.The U.S. Federal Reserve separately reopened a currency “swap” program to ship billions of dollars overseas, pumping more short-term cash into the financial system.” – taken from an article posted on The Huffington Post
This so called 1 Trillion Dollar 'Nuclear Option' has caused markets all over the world to rally (the CAC 40 at the moment over 7%). How the heck does anyone invest in such an environment where we keep seeing unprecedented intervention by governments, central banks etc?
In my opinion the markets are becoming nothing more than a Gong-show – the unexplained so called 'Fat Finger' incident demonstrated the lack of integrity the system has…