Market Recovery Falters as Global Investors Grow Cautious
FRANKFURT — Wall Street is showing confidence in the global economic scene. The rest of the world doesn’t seem quite so sure.
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 United States 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 learned to expect the unexpected.”
On Wednesday, that uncertainty was evident:
• Benchmark stock indexes in London, Paris and Frankfurt were up around 0.5 percent 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 percent.
• 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, though.
• The performance sets the stage for an uncertain beginning to Wall Street trading on Wednesday. Futures contracts that predict how the United States stock market will move were trading lower late in the European morning.
Robert S. Kaplan, the 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.
Mr. Kaplan added that share prices remained high “relative to history — that doesn’t mean they can’t go higher,” and said that the decline in stock markets was not a problem for the overall United States economy.
Investors have grown skittish in recent days about the potential for inflation in the United States. Such price rises could spur the Federal Reserve to raise interest rates faster than many had expected, essentially making it more expensive for people around the world to borrow and pay back loans in American dollars.
Those concerns eventually led to a drop on Monday of more than 4 percent in the Standard & Poor’s 500-stock index, a broad measure of the health of the American stock market.
But the following day, traders in the United States showed a more positive view over all. Growth, wages and other measures of economic health in the United States remain healthy, giving investors reasons to start buying stocks again.
“As we look forward, the market drivers of better economic prospects and higher profits have not changed at all,” Steve M. Duryee, a portfolio manager at Morgan Stanley’s Bergman Continuum Group, a wealth management firm, said in an email to clients.
By many measures, Asia’s performance also remains strong. China’s economy has revved up again, while growth in Japan has ticked up a notch. Improved economic performance around the world has sharpened the appetite for products made in Asia’s exporting economies.
The longer-term challenge for Asian economies will be whether higher interest rates in the United States would lead to a significantly broader tightening of credit. China, in particular, has turned to debt to keep its economic engine humming. While Beijing’s tight control of its financial system makes it less vulnerable to headwinds from the outside, broadly tighter credit could still have an effect.
Europe, meanwhile, is enjoying its most sustained and broad-based economic growth in a decade, unemployment is plummeting and surveys show that consumers are more optimistic than they have been since the beginning of the century.
At the very least, though, the market turmoil of recent days provided a warning that investors should not take anything for granted.
“Even if the markets do stabilize in short order, they have already reminded investors that expectations on the pace of gains must be more measured,” analysts at the Swiss bank UBS said in a note to clients.