Traders at the New York Stock Exchange today. Photograph: Keith Bedford/REUTERS
The sharp drop in global share prices today provides further evidence of just how jittery investors have become, writes Deborah Hargreaves.
The trigger for world markets to fall appears again to be inflation fears and the prospect of another rise in US interest rates later this month. But this surely masks wider concerns about the froth in some asset markets.
Cheap money and low interest rates around the world have fuelled the great search for yield among pension funds and institutional investors in recent years. This has seen prices for obscure assets from emerging markets to art and wine puffed up as buyers rush in. Commodities have been rising more quickly than ever this year and falling just as rapidly. Since when did the gold price move by $10-$20 an ounce in hours?
Investors will produce valid reasons for a rise in all of these assets. Growth in China, for example, explains the commodities boom. Emerging markets are said to be less risky than in the past as economic management becomes more professional.
But when the jitters set in these explanations are quickly ditched. Investors have been selling out of their more risky bets as market volatility has increased - this saw emerging markets fall by 20% in dollar terms in May alone. Of course, when investors are in a cautious mood all markets fall together. This is what we are seeing today.
But there is no reason why share prices in the UK and US should plummet. Corporate profits are good; inflation is rising but is not rampant.
What we are likely to see is a retreat to more defensive stocks in the longer term. This could even benefit the UK market, which is heavily focused on banks, energy operators and pharmaceutical companies. When investors retreat to safety, it is the quality assets that benefit.
