Traders were uncertain. Now, as the cliché has it, they are not so sure, says the FT’s John Authers in Wednesday’s Short View column. European and Asian stocks caught up with events on Wall Street on Tuesday but there was a reappraisal elsewhere of last week’s rally: the dollar is down and commodity prices are up again. Risk aversion is back.
The source of the uncertainty is the US, and operates at two levels: how will US consumers spend, and how will they vote?
As other measures showed the US sliding into a recession, consumer confidence refused to join in – until Tuesday. The Conference Board’s index of consumer optimism dropped last month to 64.5, from 76.4.
It has been lower than that just once this decade. That was in March 2003, the month of the Iraq invasion. Before that, consumers had not been this worried since the “jobless recovery” of July 1992. This categorically signals a recession.
This, like 1992, is a US presidential election year. Then, consumers’ pessimism virtually gave the Democrats the presidency. Markets had assumed the same would be true in 2008 – until recently.
The Iowa Electronic Markets’ presidential futures have seen a sharp shift in the past few days. They now put the Republicans’ chances, for a long time less than 40 per cent, at 46.4 per cent, their highest since February last year.
Many in the market might like a Republican president but a resurgence of uncertainty is unwelcome. Political issues confront the market at present that go beyond economic or foreign policy. Should the US bail out the mortgage market? Will it clamp down on banks’ regulation to ensure such a crisis never happens again?
These questions are technical and subtle, but they are also unavoidably ideological. They will affect securities markets the world over. From markets’ perspective, this is the worst time in decades for political uncertainty in the US to return. But that is what has happened.