The Market Mood: reacting to newsflow and the double dip

Markets remain unsettled. They're still reacting predominantly to bad news rather than good, and there's still a fear among many investors of a double dip recession. Markets are very sentiment driven, but we can weigh up all the recent good and bad news and also consider where we're at in the economic cycle. This shows us that progress is being made in both the global economy and in improving the banks' credit market's regulatory framework, and that furthermore, it's too early to make a firm prediction about the probability of a double dip.

First the bad news: in the first week of July, equity markets hit new lows for the year, retreating back to summer 2009 levels. A steep sell-off was triggered by two pieces of news: that the Chinese are finally succeeding in keeping their economy from overheating and that the leading indicators of economic recovery in the US are rolling over, i.e. the economy is now expanding at a slower pace than it was more recently. Although these developments were hardly unexpected, markets still reacted badly to the prospect of slowing growth in two major world economies.

Now the good news, which was largely ignored, seeming to almost pass the markets by: the long awaited US Financial Regulations legislation, the Dodd-Frank bill, was finally passed, as were planned European bank stress tests by some key banks. Furthermore the expiry of the €500 billion 1 year European Bank emergency bank lending facility (LTRO) did not upset the European liquidity markets as had been widely predicted.

These are all developments that will help to bring much needed structure and money into economies and markets. Yet this hasn't been reflected in recent market movements. One of the reasons for this is that governments around the world, with their slow and sometimes erratic course of action, have not contributed to the stabilisation of financial markets as they did during the financial crisis a year ago. Recent examples are the unilateral banning of certain short selling transactions by Germany and the very thin results of the recent G20 summit. Much more positive though was the UK Government's emergency Budget, which was widely welcomed as tough but sensible.