With more than $2.5 Trillion wiped off stock market values globally last week, the financial markets are braced for another difficult week ahead.So over the weekend I spoke with the Economist and media commentator Mitul Kotecha to get his views on the market volatility, the economy and how current events may effect you and me.
Here's a transcript of our discussions:
SITAL: Mitul, we've seen huge falls on the world's stock markets last week - in simple terms, what's triggered this?
MITUL: Last week's stock market slide was not attributable to a single factor but had several contributing reasons including growing concerns about global economic growth and an intensification of the eurozone debt crisis recently sucking in Italy and Spain. Effectively investor concerns turned to outright market panic.
SITAL: Saturday's 'Financial Times' drew many comparisons to the dark days of 2008 following the collapse of Lehman Brothers. Are we back there again or is this different?
MITUL: Such comparisons are justified. The problems unfolding now are in part related to events in 2008. Following the collapse of Lehmans central banks and governments had plenty of tools at their disposal to combat the crisis.
A big worry now is that many of these tools have now been exhausted, suggesting that there is potential for a further escalation of the current crisis.
SITAL: Last week's rumours of the US losing their triple A credit ratings proved correct over the weekend. What's the implications of this for the US and the world economy?
MITUL: Yes, after warning for several months, S&P ratings agency finally downgraded the US credit rating. On the plus side the two other main ratings agencies, Fitch and Moodys, have still kept the US at the top AAA rating.
In theory the downgrade should raise US borrowing costs and filter into mortgage markets while sending shockwaves to holders of US debt. In practice in the current environment of very high risk aversion US Treasury bonds are still going to be in strong demand especially given the lack of alternatives.
SITAL: Based on what we saw in 2008, what do you expect to happen in the coming days and weeks ahead?
MITUL: Markets will remain highly nervous over coming weeks, with plenty more volatility likely. The fact that many off the uncertainties currently afflicting markets will not disappear quickly suggests no let up in market pressure.
It will also be difficult for central banks and governments to do much to alleviate the pressure given that they have used much of their ammunition over recent years although there is still a chance that the US Federal Reserve may engage in another round of asset purchases.
SITAL: Given the slow and fragile recovery in the west, what's the implications on the global economy? Are we finally now looking at a double dip recession?
MITUL: The prospects of a double dip have grown especially in light of recent weak data and many will be revising down their growth forecasts.
However, there are still some positives for growth including potential for lower energy prices and an improvement in the supply chain following the disruption from Japan's earthquake.
SITAL: We've seen some massive layoffs announced by major banks in the last 2 weeks. In your opinion is this the beginning of more belt tightening and more job losses across sectors?
MITUL: Yes, unfortunately there is still over capacity in the banking industry but this is not the case in all sectors. Further job losses are likely in the financial sector and unfortunately the bigger the pressure on equity markets the bigger the economic fallout and more job losses.
Nonetheless, many companies in other sectors are lean having shed jobs during the past crisis. Job gains will be slow in the months ahead but another wave of massive job cuts is unlikely.
SITAL: Have you any final words for people watching the markets from a distance. How is all this likely to effect the "man on the street?" Should we be worried?
MITUL: It's a tough time to hold so called 'risky assets' given the prospects of more volatility in the weeks ahead. However, I would not overplay the current malaise in markets.
I still think that we will see growing signs of economic recovery in the months ahead and while it will not be easy going for the 'man on the street' I don't think we are in for a repeat of 2008 despite recent comparisons.
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Based in Hong Kong, Mitul Kotecha is Managing Director and Global Head of FX Strategy for a large European Investment Bank.
Mitul is a regular guest on TV news channels CNBC and Bloomberg TV to discuss his views on the global economy and is frequently quoted in publications such as the Wall Street Journal and the Financial Times. You can follow Mitul's views on the economy and financial markets at his personal blog, 'The Econometer'
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