If a week is a long time in politics, it is a longer time still in markets. With Greece announcing a shock referendum and the viability of the eurozone debt crisis plan called into question, the tentative optimism of last week appears to be fading fast. That said, investors should stick to their guns and focus on the long-term. It is worth remembering that these latest negative developments follow a comparatively dazzling October.
Markets around the world tumbled today and yesterday, while borrowing costs for Italy and Spain soared. The euro, too, was badly hit – eliminating any gains it made last week - as risk-aversion became the flavour of the day. The sell-off was prompted by the Greek premier’s unexpected
announcement of a planned referendum regarding whether or not the nation should accept the terms of last week’s rescue package.
Across the Atlantic, eurozone fears took their toll on Wall Street. MF Global, the US brokerage house, emerged as yet another casualty of the eurozone crisis, filing for bankruptcy protection in the aftermath of a credit rating downgrade as a result of over-exposure to European debt. In Asia, meanwhile, disappointing Chinese manufacturing figures warranted a similarly gloomy mood. The Japanese and Hong Kong indices dropped almost 2 per cent. Indeed even the Australian index fell by about 1.5 per cent despite the country’s first rate cut since 2009.
While these latest developments make for difficult reading, recent volatility needs to be placed in the right context. These fresh falls arrive in the wake of an excellent October. In the coming months, we may well see QE3 from the Fed, and the emergence of further details regarding the eurozone plan – these factors could prove positive catalysts.
The ‘risk on, risk off’ tendency has been evident in abundance in recent times. In the coming weeks
and months it seems highly probable that market volatility will persist. Long term investors may want to steel themselves, look beyond day-to-day market movements and instead focus their attention on company fundamentals.
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