Martin Flanagan: Panic stations as financial markets twist and turn in the bitter wind

The Fed has launched Operation Twist – but is it leading the markets a merry dance?

WORLD markets were in panic mode yesterday, hitting new one-day lows, and it is no coincidence that in November 2008 the backcloth for a similar tumble was equally apocalyptic: the fear that the western financial system was on the brink of collapse.

We optimistically hoped at that time that taxpayer bail-outs for major banks on both sides of the Atlantic, from Royal Bank of Scotland and Lloyds, to Citigroup and UBS, had forestalled Armageddon. We didn’t realise then that we had only passed banking debt problems on to sovereign states, and achieved little apart from buying some time.

It says a lot about today’s worrying climate that financial markets are, even now, more worried about eurozone sovereign debt than unmistakable evidence of a global economic slowdown. Fears of a double‑dip recession are trumped by anxieties over a potential financial meltdown if the euro project tumbles into the dust. The euro hit a fresh low yesterday.

Worries mount about the solvency of eurozone banks given their potential exposures to both major states such as Italy and Spain, and peripheral players such as Greece and Portugal.

The question remains how far individual eurozone members would be prepared, somewhat ironically, to give up a major slice of sovereignty to deal with their sovereign debt problems. Pessimists say eurozone members must hang together in the single currency bloc through harmonised tax and spend policies, or hang separately as financial markets call their debt‑laden bluffs.

Meanwhile, it is now becoming almost common parlance to refer to the possibility of a coming “lost decade” for the European economies á là Japan in the 1990s. Are we now moving into generational territory as far as the impact is concerned? It looks touch and go.

Talking to market dealers and political commentators, there is dismissiveness of the leadership abilities of three of the EU’s core member politicians: Merkel, Sarkozy and Berlusconi are seen as lightweights in the eye of the storm.

In fact, some of my dealing-room contacts say straight‑faced that the scandal‑beset “Berlusconi” factor is probably worth 100 basis points to the interest rate Italy is having to pay on its debt as, like Greece, that country continues to do the “hokey cokey” on how committed it is to any austerity programme.

Far from being anticipatory in attacking the eurozone problems, Europe’s leaders have been chronically reactive; and ineffectively reactive.

International Monetary Fund boss Christine Lagarde has said Europe’s debt problems could suffocate any recovery. She points out the obvious, but her position gives the observation much greater authority, that it seems politicians lack the will to solve the debt crisis.

Against this bleak backdrop, many more billions of pounds were wiped off stock markets yesterday. Paris and Frankfurt fell as much as London.

Having said that the eurozone’s woes are the biggest worry for investors, there is also deep anxiety about the slowing US and Chinese economies. That’s why commodity companies were among the biggest fallers on the FTSE 100 index yesterday.

As has become a given, both before and after Standard & Poor’s downgrade of the credit rating of the United States, it is no good markets looking west for solace. The Fed’s so‑called $400bn Operation Twist of buying long debt and selling the same amount of short debt to buttress the flagging US economy was overshadowed by the American central bank emphasising the “significant downside risks” to the economy.

The result was that further big Wall Street losses yesterday followed large losses the day before. Meanwhile, rounding off the gloomy picture in London, the CBI revealed a bigger than expected weakening in factory orders.

It’s not just the Americans, we are all in a twist.

Tesco looks to volumes over margins – and shoppers cheer

THE thing about Tesco’s latest price‑cutting campaign is whether consumers will notice the difference. Along with Asda, it is difficult to remember a time when those two supermarkets were not in the business of cutting both prices and terms to suppliers to squeeze competitors in the food retailing sector.

You have to remember that when the likes of Tesco slash prices, they are normally doing so from an already slashed base.

Still, in this climate shoppers will hardly complain that Tesco puts pressure on rivals through further discounting. Flagging consumers need all the help they can get.

How far Phil Clarke, Sir Terry Leahy’s successor, is eventually prepared to eat into the group’s profit margins with price cuts is going to prove interesting.

But he would not be alone in this retailing climate to feel volumes and market share are more important than margins short-term.