I was expecting to report some news today on the UK election. It turned out of course that there is quite a lot of news on that front but in terms of market news even this was overshadowed by what happened in Wall Street last night at around 7:40pm UK time. The best way in which this can be represented is by this chart I am showing below. I would suggest you take a look at the bottom right hand corner.
When this was first shown to me I found it fascinating. You see what it shows is a market falling too fast for the technology to keep up (or at least Google’s charts!) and this is a very apt metaphor for what actually took place. For those who are unaware of what took place suddenly the Dow Jones plunged and it was quite a plunge making a total fall of 997 points. Now this is the largest intra-day fall for this index ever in points terms although one has to be careful because it has fallen further in percentage terms (20% in the crash of 1987).
What does this mean/portend?
For this sort of thing to happen then you need the right circumstances and as I wrote yesterday
These sort of things thrive in such uncertain times and in a fearful environment some start to actually believe them. What was more realistic in my view was nervousness about the state of the interbank market and what might be happening there
In other words fear was the driving force of the drop. Now there are all sorts of stories about how this took place. I would counsel caution about some of them, I do not know about you but if I try to do anything electronic my system keeps coming up with “do you really want to do that?” so the idea that in a trading system someone can put billion rather than million and it does not get challenged does seem a little far-fetched. Indeed I once saw a rather amusing sketch which considered what would have happened if Microsoft had invented the car. You put your key in the ignition and you get “do you really want to do that?” you turn the key and get “do you really want to do that?”, you switch the windscreen wipers on “do you really want to do that?” and so on leading to the opinion that the motor car would never have caught on!
Also the argument that this was a pure glitch has to deal with the fact that the Dow Jones closed down some 348 points and it was followed by heavy overnight falls in Japan and Australia. This morning Europe’s equity markets are falling too. Other markets responded with oil falling US $3 per barrel and currencies were volatile.
The idea that Greece was the cause may be popular with TV stations but again is much less than a full explanation. The Greece story may have led to some of the fall but it is a long way from a full explanation. After all equity markets have shrugged off bad news from Greece on plenty of days recently.
To my mind it was relatively simple. We have had the basic human emotion fear circling the markets for a few days and in that type of atmosphere some heavy selling pressure which appears to have hit Procter and Gamble (an odd stock for fear to circle if you think about it) seems to have pushed things over the edge. However if you look at the exact times then there is a 7 minute period where the markets falls before anything happened to Procter and Gamble. So again this is much less than a full explanation.
As a further thought for you this is something that certainly was exacerbated by programme and computer driven trades. They will have responded automatically. There may well be considerable costs for people who trade with stop-losses and very mechanical hedge fund style trading could easily have come a cropper just like Long Term Capital Management in the late 1990s. As someone who was for a time a floor trader I was concerned about this sort of thing happening when computers and technology replaced human face to face trading. Whilst computers are plainly more efficient and cost-effective they also increase volatility in times of nervousness I feel.
This story will run and run but whatever anyone tells you the real driving force was fear. Also as many trading/analysis systems such as Yahoo and Bloomberg struggled one can say that technology could not cope with the implications of its own actions.
The UK Election
After a night of rumour and counter rumour it looks as though the UK is heading solidly into hung parliament territory which we have not been in since 1974. One could say that all 3 main parties lost. Labour plainly has had a heavy swing away from it and it has lost a lot of seats, indeed it is its worst result for many years. The Conservatives gained a lot of seats but look to be short of a majority. The biggest losers compared to expectations were the Liberal Democrats who after expectations of a surge during the campaign are now facing the prospect of losing seats.
In the UK constitution the existing Prime Minister has the first opportunity to try to form a government. Plainly giving the large loss of seats he will need coalition partners. However one unexpected factor is the weakness of the Liberal Democrats, so I feel that there will be some interesting negotiations. However I do not expect them to succeed for any length of time as the two parties together look too weak n terms of seats to actually run a government. But they may well try…
I noticed last night that some of the smaller parties (Unionists in Ulster) were preparing demands in return for support (in this case of a minority Conservative government) and we may see more of what I call the tail wagging the dog. I am not sure that such behaviour will improve the general sense of dissatisfaction with UK politics.
I also notice that some politicians seemed to draw strength from the improved voter turnout. This I saw as a disturbing feature as I feel that they are too willing to draw a line under the so-called “rotten parliament” which has just ended which leads to the suspicion that they feel they can go back to carrying on as before. The fact that the turnout was up is a good thing, but it would not surprise me at all if our politicians draw the wrong conclusion from it.
One nice touch was that the Queen said that she would not talk to anyone until after lunchtime today, well-played Ma’am.
I have suggested before that I thought that a hung parliament might make our politicians focus their minds on our economic issues. However whilst this is a very early stage it does not look like any party is in a strong enough position to cobble enough votes to govern. So we could get uncertainty for quite a while. If you want a historical precedent Ted Heath’s government in 1974 lasted for 3 days. So in reality we may well get uncertainty for a while which in my opinion is exactly what we do not need. Our economy needs certainty and action on the deficit.
The fear that is surrounding financial markets that I wrote about yesterday was put into numbers by the flash crash which happened on Wall Street later in the day. However there are concerns in other markets particularly the interbank markets which are showing signs of the sort of dislocation which preceded the fall of Lehman Bros. This therefore is not a good time for political uncertainty in the UK. If you look at our gilt market and our currency the markets appear to agree with this view
If you are looking for a wider world view the Bank of Japan last night pumped money into the markets in a type of measure to “increase markets’ sense of security”. I think that the story of money market dislocation is showing signs of rearing its rather ugly head again…