Bill Jamieson: Eurozone crisis is a boil that’s still to be lanced

From Spain to Greece, protesters have campaigned against the cuts which are a result of the eurozone’s instability

WHEN it comes to summing up world stock markets this autumn, it is hard to beat William Hague’s acid description of life in the eurozone – trapped in a burning building with no exits.

While the main UK benchmark, the FTSE100 Index, managed a gain of 68.3 points or 1.2 per cent over the week to 5,128.5, it is the 14.4 per cent plunge over the third quarter that is seared on investor consciousness – the worst such autumn fall since the bursting of the dotcom bubble in 2002.

Such is the deep anxiety over how the eurozone debt and deficit crisis might play out that even better than expected news that would in normal circumstances drive markets upward has been swept aside.

A flurry of data released towards the end of last week should have cheered investors looking for signs of hope amid the gloom. There was a better-than-expected upward revision to US second-quarter GDP figures. And weekly jobless claims numbers fell to their lowest level since April.

On top of these, Friday brought rather positive readings from two key business confidence surveys. There was a surprise bounce in the Chicago ISM index and a larger-than-expected uplift in September’s University of Michigan consumer sentiment measure.

America’s business outlook is not – or not yet – set for a headlong plunge into recession. In fact, its economy looks to be on course for growth of 2 to 2.5 per cent this year, and with the downside risk to this pared back a little.

Yet it is the eurozone’s doomsday scenario – the spectre of a disorderly sovereign default by Greece setting off a cascade of bank failures and a financial panic – that weighs over the UK. It is putting investment plans on hold, weakening the banks, holding back lending and corroding business confidence. Add to this the European Commission’s evident determination to press ahead with a tax on financial transactions that would hit the UK hardest – and it is impossible to argue that because we are not members of the single currency zone we are not much affected. That said, for all that investors must be inured by now to the volatility of equity markets – 1987, 1991-2, 2001-3, 2008-9 – nothing really prepares us for the speed and viciousness of these falls. Gains built up over years in modest regular contributions to Individual Savings Accounts and regular savings plans can be wiped out in weeks, sometimes days.

Intense volatility now seems a permanent feature of stock markets – supposedly priced on the basis of earnings research and analysis. What, one wonders, is the point of it all when hedge fund activity, industrial-scale short selling and high-frequency trading – the buying and selling of shares in vast quantities in seconds and fractions of seconds – have so stacked the odds against the “long-only” investor. Little wonder fund management companies are facing a surge of redemptions.

But behind each stock market plunge have been fundamental reasons for the falls, and this autumn is no exception: a severe budget deficit crisis in the US with a downgrading of the country’s credit rating; an even more severe sovereign debt crisis in the eurozone; and a marked deterioration in growth prospects across developing country economies. Downgrading of China’s growth forecasts added to market woes last week.

The falls have left virtually no asset class untouched. US and European markets have plunged almost in tandem, emerging market shares have fallen for five straight months and almost $6 billion (£3.9bn) was pulled out of emerging market funds in the five days to last Wednesday.

Even gold, hailed by many as the ultimate safe haven, was showing a 20 per cent fall from its $1,920 peak earlier last month (and a 15 per cent fall in just three days) before a rally set in. It is hardly the sober behaviour of an asset being hailed as the ultimate store of value. But then, it is an asset class driven like no other by crisis and fear.

Arguably the most depressing concern for investors is not the immediate series of crises in the eurozone and the near constant drip of poor economic data but the growing conviction that we are heading for a prolonged period of stagnation and low growth stretching for years ahead.

Investors cannot see any light at the end of the tunnel, no prospect of an upturn on the horizon, no escape from the crushing weight of debt and austerity economics.

Indeed, so black is the mood and so fearful the prospect of a systemic bank and financial collapse in the eurozone that anything less than apocalyptic news – one hesitates to call any economic news these days good – is crowded out.

For private investors it is all so daunting, and with paltry returns on bonds and gilt edged stock continuing to fall. The most prudent course for now is to stick closely with dividend-paying big companies and income-orientated investment funds, while allowing cash holdings to build as events in the euro danger zone play out.

I wish I could say that the better news from America might indicate that the worst may soon be over. Unfortunately, however, I fear the eurozone’s sovereign debt boil is yet to be lanced.