Investors take fright at geo-political tensions, poor earnings and economic data

Argentina's debt default, worries about the impact of Russian sanctions and concerns for the global economy triggered a sell-off in world stock markets on Thursday.

In Argentina the Merval index dropped 7.6pc in early trading after the South American country defaulted on its debt for the second time in 12 years.

The country missed a deadline to pay $539m (£317m) in bond interest payments and now it is up to the International Swaps and Derivatives Association to rule whether a failure-to-pay "credit event" has occurred.

And:

Europe's main equity indices fell on concerns that tougher sanctions against Russia could hurt the region's economy.

Investor sentiment in Germany – a key exporter of goods to Russia – took a blow after German sportswear giant adidas issued a profits warning linked to the crisis in Ukraine.

Germany's DAX fell 1.9pc, dragged down by a 15pc fall in adidas shares, France's CAC lost 1.5pc, Italy's MIB dropped 1.5pc, Spain’s Ibexdropped 2.1pc and Portugal's PSI 20 fell 3pc, driven by a 42pc slump in shares of stricken bank Banco Espirito Santo (BES), which posted a record first-half loss of €3.57bn late on Wednesday.

David Fuller's view

Most investors know that Argentina has long been a poor credit risk, so I do not regard this default as more than the proverbial ‘straw which broke the camel’s back’.

There are various contributing factors that have worried investors, from an increase in high-profile warnings, to valuations, trend overextensions, the Fed’s tapering of QE and a realisation that the US would lead western countries in an eventual normalisation of interest rates. 

However, the event that has most affected sentiment, I maintain, is this week’s realisation that the EU and USA were really serious about sanctions against Putin’s regime in Russia.  For evidence, we have had the clear underperformance of many European stock market indices in recent weeks, including Germany’s DAX (daily & weekly) and France’s CAC (daily & weekly) which are now testing their 200-day moving averages after failing to maintain June’s moves to new recovery highs.  Austria, with its Eastern European connections, from Erste Bank to Hungary and Bulgaria remain considerably weaker.

For more on this subject see Eoin’s comments below, listen to this week’s Audios if you have not already heard them, and my written comments earlier this week, including the rest of this comment on Tuesday 29^th July:

“Moreover, the market is a voting machine in the short to medium term.  If a sufficient number of other global investors conclude that they do no wish to carry more risk in Europe and the USA, especially when Asia is recovering, the Western markets could easily underperform until tensions with Russia subside and sanctions are removed.”