Market recovery falters as global investors grow cautious

FRANKFURT

A day of respite for stocks on Wall Street had indicated confidence in the global economic scene. The rest of the world, it seems, is not quite so sanguine.

After a strong increase in share prices in New York a day earlier, stock markets in Asia and Europe lacked a decisive direction on Wednesday, with some up, some down and some little changed. Analysts said that investors were trying to work out whether big declines in previous days signified a mere speed bump or the beginning of a roller-coaster ride.

Adherents of the speed-bump view of things could point to a fundamentally excellent economic climate, including strong growth around the world, tame inflation and interest rates that remain extraordinarily low by historical standards.

Roller-coaster theorists, by contrast, are fretting about a variety of dangers, like the risk that the US economy could overheat because of too much stimulus, the possibility of inflation making a comeback, and an era of easy money coming to an end.

“For investors, there are two paths, either go with the panic or stick with the fundamentals,” said Carsten Brzeski, an economist at ING Bank in Frankfurt. “Over the last 10 years, we have learnt to expect the unexpected.”

On Wednesday, that uncertainty was evident:

— Benchmark stock indexes in London, Paris and Frankfurt were up between 0.5 and 1 per cent in morning trading, not enough to make up losses of double that amount in the previous trading session.

— Earlier in the day, markets in Asia were flat or down as they failed to sustain a stock market recovery in the United States. Though Asian stocks started strongly, investors grew more cautious as the trading day went on. Stocks in Tokyo ended about where they’d begun, while Hong Kong’s finished down modestly. An index of Chinese company shares traded in Hong Kong fell 2 per cent.

— An index of stock market volatility, known as Wall Street’s “fear gauge,” surged to its highest level since 2009 on Tuesday. It has since pulled back, but remains markedly higher than its level in recent months.

— The US stock market remained fragile, with shares fluctuating and volatility measures double levels from last week

Robert S. Kaplan, president of the Federal Reserve Bank of Dallas, said during an appearance in Frankfurt that the recent losses could be seen as a positive, if they served to discourage investors from relying on borrowed money. That will be increasingly important as central banks tighten monetary policy and credit becomes more expensive.

“I think that can be a healthy thing,” he said.