Financial markets have been flashing lots of indicators in the past month which have spooked investors and led to a flight ticket from risk for point about this year, drawing parallels to the financial crisis of 2008.
Like that year, banks are the big focus, with investors this week selling off U.S. and European banks around credit fears.
But while there are shades of 2008 here, this is really a repeat of what happened in 2011, say analysts.
On Wednesday, reports from both National Bank Markets and Citigroup drew parallels between this season and also the volatility flare up five years ago, when the European sovereign debt crisis roiled markets and brought the S&P 500 to the brink of the bear market.
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“2011 was also a time of heightened volatility in markets associated with fears of a global recession,” said Ste?fane Marion, chief economist and strategist at National Bank Financial Markets. “At the time, concerns about a potential credit crunch were dedicated to Europe.”
Many from the financial market recession indicators that crept up in 2011 are flashing today. Widening credit spreads in non-investment grade bonds, rising negative sentiment and peak-to-trough performance in global stock markets are near mirrors of one another.
Tobias Levkovich, chief U.S. equity strategist for Citigroup asserted most of the sentiment metrics and stock exchange moves line up perfectly with what was seen in 2011.
“With most data not implying an imminent U.S. recession, including the latest small business hiring intentions and rising open job listings, the comparisons to 2011-12 seem appropriate including sentiment metrics and collapsed stock prices,” he explained.
Levkovich adds that there’s a “quite severe” rolling bear market underway right now, reflected in the punishment that banks and stocks take. The number of stocks down 30 per cent or even more off of their 52-week highs has returned to the levels observed in 2011 and 2012. Rolling bear financial markets are concentrated in certain sectors rather than synchronous market decline.
While there are many parallels between 2011 and now – European bank liquidity for instance is within focus right now because of the fears surrounding Deutsche Bank – the two main market determinants within the coming month will be China and also the U.S. Federal Reserve, says Marion.
China will approve its upcoming five-year plan in mid-March, that will offer markets more concrete information on how the nation is steering its economy into exactly what is a hoped-for soft landing. The Fed, meanwhile, will provide more clarity about its monetary policy and also the path of rate hikes this year.
In the interim, Marion does not expect an imminent financial crisis and subsequent recession to sideswipe markets.
“We would reason that the current degree of financial stress is the wrong size to topple the worldwide economy into recession,” he said.