panic stations like a sinking submarine, page-3

Q&A: Why are markets falling again?

Global stock markets have been falling, with some experiencing their biggest drops since the crash of 1987.

A London trader on 14 October
Calling the bottom of the market is a tricky job

The Dow Jones in New York fell 8% on Wednesday while the Nikkei in Tokyo dropped more than 11% on Thursday.

This comes despite trillions of pounds being pledged worldwide to secure the future of the banking system.

Markets rallied earlier in the week, but have now largely lost those gains.

Has something new happened to spark the falls?

Retail sales figures in the US on Wednesday were almost twice as bad as had been expected. This is a particularly serious problem in the US, where consumer spending accounts for more than two thirds of economic activity.

The figures suggested that the banking crisis has been feeding through to the rest of the economy faster than had been expected, which is a worrying prospect.

What happened to the cheer from the bank rescue packages?

There were indeed big gains on stock markets earlier in the week as countries seemed to be prepared to work together to solve the banking problems that were at the heart of the credit crunch.

The problem is that despite the rescue, there is a widespread belief that many of the world's biggest economies are going into recession.

The oil price has fallen, with Brent crude dropping below $68 a barrel, because it is thought that as economies slow there will be less oil used. The same argument goes for copper or coal.

That means that there is likely to be less demand for the products of the big global commodities companies that are particularly well represented on the FTSE 100.

There are also concerns that despite the huge investments pledged by governments, banks have still not started lending money to each other.

Japanese Prime Minister Taro Aso blamed the latest market falls on the $700bn (£406bn) US bail-out package not being enough, which is making people wonder how much it could eventually cost to solve the problems.

How much further down can the markets go?

Spotting when markets have reached the bottom is a tricky and risky process.

Many traders believe in the idea of capitulation, which broadly means a market surrender.

This is when investors are prepared to get out of the market at any price because they have given up all hope of making money from their shares.

It is often marked by panic-selling and very high volumes of transactions.

The idea is that after capitulation you reach a point at which the last investor who is desperate to get out of shares and move into supposedly less risky assets has sold out.

Once there is a widespread belief that the bottom has been reached, bargain-hunters pile in and the market recovers.

Have we reached the bottom of the market then?

It is really difficult to say.

Some people think we're nearly there.

The trouble is, some people reckoned we'd reached that point last month.

There were those who declared capitulation had been reached on 15 September when the Dow Jones index fell 504 points in a day.

But since then it has fallen another 2000 points.

Capitulation is easy to spot in retrospect but the people who recognise it accurately at the time can get very, very rich.

http://news.bbc.co.uk/2/hi/business/7673668.stm