The markets rout

The recent rally on the markets is now the most distant memory. Stocks continued to fall today amid concerns about the European sovereign debt crisis, negligible growth figures in the developed world and cooling Asian economies. Robert Peston has an excellent account of the causes and effects of the latest rout.

Banking stocks were brutalised, with Barclays and RBS both shedding more than 10 per cent of their value, with Lloyds and HSBC not far behind. Continental banking stocks were similarly mauled, with Soc Gen losing 12.34 per cent and Commerzbank being shorn of 10.42 per cent of its value.

But the unease spread across exchanges as investors put their money in the safest havens. The price of gold, for instance, reached a new high of $1,816/oz today, and yields on UK gilts remained at record lows during this morning’s debt auction. Meanwhile, the FTSE closed 4.49 per cent down, the CAC by 5.48 per cent and the Dax by 5.82 per cent. The DOW is also in arrears at the time of writing, by 3.63 per cent and counting.

Obviously, this is very worrying, particularly for those whose incomes rely on share prices. The markets clearly have little faith in the political solutions that are being offered to control US and the Eurozone debt. But their scepticism of politicians doesn’t end there. Analysts doubt that indebted consumer countries like ours can rebalance our trade deficits, which will be essential to long-term recovery. This is both a problem of contracting global demand and inadequate domestic supply. Furthermore, the markets are apparently only beginning to factor in inflation, which continues to rise in the developed world and particularly in Britain. At the same time, UK bond yields are now so low as to be in deflationary territory, which creates its own problems for policymakers and investors. These are interesting times indeed.