Key markets enter bear territory - has quantitative easing backfired?

Financial expert warns that banks are exposed in a way that is similar to before the 2008 crash...

finance, markets, business

John Phillips / EMPICS Entertainment via PA

The Nikkei index in Tokyo fell by another 5% overnight meaning it has fallen by more than 21% in value since the start of the year and most other major markets moving deeper into so-called 'bear territory' – that’s where prices have fallen more than 20% from their most recent highs.

Commentators reporting that fear is gripping worldwide markets as investors grow more concerned about weakening economic growth, lower corporate and banking and increasingly look for so-called safe havens for their cash.

Major banks, in particular, have been hit due to worries about the quality of their lending to emerging market countries and to the energy and mining sectors; worries also about their reduced profitability in an era of prolonged low or even negative interest rates.

The Swedish Central Bank introduced negative interest rates for some overnight bank deposits yesterday.

The French Bank Societe General led the retreat yesterday losing more than 8% in value as it missed fourth-quarter profits estimates.

Gold prices rose by close to 5% yesterday to their highest price in a year – nearly $1250 per ounce.

Currencies such as the yen are seen as safe - although its growing strength is not helping Japanese exports.

The numbers of investors piling into UK ten-year government bonds caused the yield or interest rate on those bonds to fall a four-hundred year low yesterday.

One of the issues driving markets lower at the moment is a fear that Central Banks have lost power to boost markets and prices through additional stimulus measures.

Peter Brown of the Institute of Investing & Financial Trading told Breakfast Business that he still believes Mario Draghi could have a major role to play at next month’s meeting of the European Central Bank.

He described the factors provoking the current spell of market disruption as "very simple."

"We have lent a huge amount of money to commodity producing countries and companies," according to Mr Brown this has left Western banks highly exposed, in a way similar to before the 2008 crash.

"The theory behind that exposure was, quantitative easing, leads to inflation, that means commodity prices go up. We get growth - that was 2009 thinking - that hasn't worked at all."

"Commodity prices are on the floor. We are in a situation where these assets are, in theory, bust," he continued.

Now the question is, "'Will they default on mass?' - or are we going to extend and pretend?"

He adds that there is a "65%" chance that markets will "extend and pretend" - but there is also a "35%" chance that investors could lose faith in commodities and policy makers who are trying to stimulate markets.