The past two Thursdays have seen extraordinary things happen in financial markets.
Last Thursday, BNP Paribas suspended redemptions on 3 of its funds, forcing the ECB to inject €95bn of liquidity into the financial system. Yesterday, the largest US mortgage lender, Countrywide Financial, had to raise an emergency €11.5bn loan in order to continue trading, whilst the US$ fell over 3% against the Japanese yen from ¥116 to ¥112.
We now seem to be on the edge of a downward spiral, where all the elements that supported financial markets unwind at once:
• US house prices fall, causing lenders to restrict further loans
• Food and energy prices rise, leading inflation to reappear
• Currency markets readjust, ending the ‘carry-trade’
• Risk perceptions change, making M&A unattractive
• Volatility returns, as people sell indiscriminately
We are not yet at the point where the real economy, in which we all live and work, is necessarily going to nosedive into recession. But a few more Thursdays like these will certainly test its robustness. We could well be close to finding out, as the old English nursery rhyme says, that ‘Thursday’s child has far to go’.