Why the markets are being whacked

If you’re bewildered why markets around the world keep falling, there’s a fairly simple explanation.

It’s panic.

Investors have simply lost confidence in the world’s central banks, equity and bond markets and are selling out of any risk assets – and probably rushing to the supposed safety of cash and gold.

Here’s the toll of trouble apparently inflicting global markets…

  • Oil and gas companies are failing and many more are expected to follow, as we wrote earlier this week.
  • Banks exposed to oil and gas companies will be next since the banks will now face defaulting customers and will then be unable to repay their borrowings.
  • Since banks are globally interconnected, all banks are assumed to have some liability exposure.
  • Negative interest rates in a few countries, particularly in Europe, make it hard for banks to earning a meaningful margin, so their profits are going to get whacked.
  • Record low prices for commodities (other than oil & gas) will cause distressed mid-tier and junior resources companies to fall over – adding to the banks’ woes.

Those reasons are partly why Australia’s big four banks Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) have lost as much as 19% of their value since the start of this year – and we’re not even half way through February.

But much of the woes detailed above are imagined by investors – and may never be realised. That doesn’t much matter for those that are panicking, thinking they need to get out at any cost.

US oil prices fell to US$26.35 a barrel overnight – the lowest price in 12 years, and with ongoing oversupply could fall even further, that is bringing even more pressure to bear on energy companies.

Resources companies are definitely feeling the pain – as I wrote yesterday, both BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) have each lost US$1 billion a month in revenues due to lower commodity prices in the past 18 months or so, and Rio was forced to slash its future dividend. BHP is likely to follow suit.

It’s probably no wonder then that shareholders are selling out of resources companies, but with equity and bond markets sinking, they appear to be choosing the relative safety of cash and gold.

As an indication of that, spot gold prices are soaring. Overnight, gold gained another 4.1% to rise to US$1,246 an ounce. In Australian dollar terms, that’s A$1,755 an ounce – if not a five-year high, it’s close.

Foolish takeaway

History has repeatedly shown that investors that follow the crowd and sell out at the lows will end up the losers. Foolish investors should ignore the market noise and your natural instinct that screams at you to sell out. Doing so could be hazardous to your wealth.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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