Strap on your helmet.
Cinch up your flak jacket.
Grab some Dramamine.
After yesterday’s nearly 1,000 point drop and 650-point rebound on the Dow, these items should be standard equipment for any trader. Although the index was only down 348 at the close, Thursday was one of the most volatile days in trading history.
It was the worst trading day since February 2009 when the Dow swooned to a 12-year low. Over the past three days, the Dow has lost 631 points, 5.7 percent of its value.
Several exchange officials in New York are saying that the precipitous fall was computer driven, triggered by a typographical error. While there may be some truth to this account, it tells only part of the story.
As I have been saying for several weeks, the European market is on the verge of turmoil. Consequently, traders in the U.S. have had one eye on the domestic economy and the other on Europe. Riots in Athens combined with an uncertain response by the remaining members of the 16-member European Union have created an atmosphere of uncertainty from New York to London and Tokyo.
Bracing for a Downfall
As one trader put it, at the close of yesterday’s trading session, the situation is “like dry tinder doused with gasoline.”
Amid the chaos that has gripped Greece, the euro currency has plunged to a 14-month low. In response, spot gold prices surged above $1,210 an ounce, just $16 short of the high it reached on Dec. 3.
Following a joint communiqué from German Chancellor Angela Merkel and French President Nicolas Sarkozy urging their fellow members of the 16-nation European Union to back a Greek bailout, the euro rebounded slightly. However, a stronger than expected U.S. jobs report pushed the dollar higher and has driven the euro back to a new low at $1.25.
Despite the unified front presented by France and Germany in support of a rescue package for Greece, the European economy is not out of the woods.
The austerity measures that were a pre-condition to aid, only passed the Greek parliament by a scant majority. Continuing public unrest and staunch opposition by Greece’s powerful labor unions has left the government of Prime Minister George Papandreou on shaky ground.
Most observers of the European situation agree that Greece is only the tip of the iceberg. While they’ve been better at masking their problems, Portugal, Spain, Ireland and Italy are all facing similar debt dilemmas. Early this week, Moody’s Investor Service downgraded Portugal’s credit rating, and appears poised to do the same for Spain and Ireland unless they quickly get their houses in order.
Rocky Ride Ahead
The level of alarm over the uncertainty in Europe caused the G-7 to convene an unscheduled emergency conference call among its finance ministers (including Treasury Secretary Tim Geithner) today to discuss their possible responses to the widening crisis.
Britain is not an E.U. member, but the pound sterling has been getting hammered along with the euro. The British situation has been made all the more complex by the fact that there was no clear winner in yesterday’s parliamentary elections, raising doubts as to whether Prime Minister Gordon Brown will be able to hold onto his job. By the same measure, with the threat of deflation still looming and the burgeoning unpopularity of Japanese Prime Minister Yukio Hatoyama, Tokyo can ill afford a further falloff by any of its key trading partners in Europe.
Across the boards, investors are starting to pay more attention to protect their equities. The benchmark indexes for U.S. and European stock options jumped to the highest levels in more than 12 months on concern that Europe’s leaders won’t be able to control the debt crisis. Reflecting the misgivings investors have about current market conditions, the VIX, as the Chicago Board Options Exchange Volatility Index is known, jumped 23 percent to 40.47. This is the biggest increase in the VIX since September 2008. Likewise, the VStoxx Index, which measures options on the Euro Stoxx 50 Index, surged 42 percent to 52.11, headed for its biggest gain since September 2001.
After the MSCI World Index of stocks in 23 countries dropped 2.8 yesterday, investors may not be fleeing the markets, but they clearly are willing to pay more to protect their equities. If the Europeans are unable to stop the slide in Greece or to prevent a further deterioration among its weaker states, the global stock sell will continue jeopardizing the recovery here and abroad.
Brace yourself. It’s going to be a bumpy ride.
John Cohn is a senior partner in the Globe West Financial Group based in West Los Angeles. He may be contacted at www.globewestfinancial.com
