Market Rout Continues

After a very bad day in the US, Asian markets swooned and European markets fell again, but their declines are less gut wrenching. 2-3% falls in most Euromarkets at the opening (2.5% for the FTSE, 2% for the Dax, and 3.5%.for the Milan’s FTSE-MIB) but for the most part, they have come back somewhat as of this hour. The FTSE is now down 2.2%, the CAC 40 a mere 1.2%, the DAX 2.7%, and the FTSE-MIB has is in positive territory, up 0.25%. This follows plunges of 3.7% for the Nikkei and 4.5% for the Hang Seng indexes.

US futures had been up modestly as of now (9 points for the Dow and 2.5 points for the S&P 500) but are now in negative territory (67 points for the Dow and 6.4 for the S&P). Non-farm payrolls are released before trading opens, and a disappointing number could kick off more widespread selling (one analyst opined that it would take “a really strong report” of 150,000 or more job additions in July, to have a lasting impact on investor worries). The euro is up a smidge, 1.41 to the dollar, and the yen has strengthened to 78.5 despite heavy intervention by the Bank of Japan on Thursday.

There is plenty of evidence of rattled nerves. Commodities took a hit, another sign that deflationary expectations are taking hold. But perhaps the biggest change in attitude is lost faith that central bankers can or will intervene successfully. Bond purchases by the ECB did little to calm markets (a recovery in Italian and Spanish bonds quickly reversed). The Fed seems bizarrely preoccupied with inflation although the real problem is that what the US needs is fiscal stimulus to offset consumer deleveraging and failure of businesses to invest. We actually need more bankruptcies and asset writedowns in combination with more aggressive spending. In Euroland, the scope of the sovereign debt crisis has now reached the too big to fail Italy, and one of my German press reading contacts said that finance minister Wolfgang Schauble nixed yesterday the notion of enlarging rescue facilities.

Even though the US media has tended to focus on a series of bad data releases as teh trigger for the declines, in addition to no one being happy with the immediate resolution of the faux debt ceiling crisis, the bigger source of near term risk is the escalating Eurozone crisis (and Europe in not halfway around the world from an economic standpoint; the US economy is considerable integrated into it, with roughly 25% of S&P earnings dependent on it, for instance).

Thanks to the failure of the ECB intervention yesterday to accomplish much, Eurozone leader appear to recognize the need to Do Something, but given that they seem to need to Do Something every two weeks or so, their response time is increasingly lagging market demand.

On a cheery note, Marc Faber deems stocks to be “extremely oversold” and argued for a 40 to 50 point bounce on the S&P. But remember, violent rallies are a bear market staple.

This post originally appeared at naked capitalism and is reproduced here with permission.