The disappointing US jobs report on Friday hammered markets. US stocks tanked and the trend has continued into Asia and over here this morning.
Commodities slid too as investors fret that global growth won't be as strong as they'd hoped. Even oil has plunged, despite the various tensions in the Middle East.
It's all evidence that investors are losing faith in the big V-shaped recovery story. And they're right to...
The Dow Jones Industrial Average slid sharply on Friday, losing 3.2% to close at 9,931. The S&P 500 meanwhile, slid 3.4% to close at 1,064. Investors were already jittery as concerns over Europe continued. But what really hammered them was May's non-farm payrolls report.
The non-farm payrolls report is one of the most important economic indicators anywhere in the world. It shows the employment situation in US.
In effect, it tells us whether the world's biggest-spending consumers are getting wealthier or poorer. If more Americans have jobs, they're more likely to spend. US consumer spending accounted for roughly a fifth of global GDP back in the good old days before the credit crunch. So that matters for the rest of us. If they're all living in fear of unemployment, they'll pull in the reins. That means less demand for imports from the rest of the world.
The payrolls report also tells us how private companies are feeling about the recovery. If they're hiring lots of staff, then they clearly expect things to get better. If they're sticking with their now-depleted staffing levels, it shows they're still hunkering down.
The bad news is that May's report was very disappointing indeed. The number of jobs rose by 431,000, compared to economists' hopes for 515,000. That doesn't sound too awful. But the really bad news was that just 41,000 of those jobs were in the private sector, many of them temping jobs. The vast majority of the jobs – 411,000 – came from hiring by the US government's Census Bureau. These are all short-term contracts of course – the census only comes around once every ten years.
As Wells Fargo chief economist John Silva told Marketwatch, there might be growth, but it's "too slow to generate the revenues public policymakers are hoping for, too slow to generate all the jobs households are expecting." Meanwhile, the figures for March and April were revised lower.
"It was extremely disappointing", one US fund manager told Reuters. "We know that employment is the lagging indicator but… we've been saying that for a year. There comes a time when we're really going to have to see that number pick up."
Markets are right to be rattled by Hungary's problems
But they may have shot themselves in the foot this time. The last thing a jittery market wants to hear is the spokesman of a country's prime minister saying that fears of a default are "no exaggeration". The government took it back the following day, but it's hardly a giant vote of confidence.
Hungary of course has its own currency, the forint, which tanked. But it was bad news for the euro too. For one thing, general risk appetite took a hit. These days, when investors get scared, the euro is one of the assets they dump.
A more important problem is that many European banks loaned Hungarian homeowners the money to buy their properties. Those home loans are denominated in euros. So when the forint dives against the euro, payments shoot up. And that means some people simply won't be able to pay their bills.
Defaulting Hungarian homeowners mean more dodgy debts for shaky European banks to absorb. They have plenty of dodgy debt in their own countries to worry about without having to fret about Eastern Europe too.
So it's little wonder that the euro hit a four-year low against the dollar, sliding below $1.20 for the first time since March 2006. The single currency has taken a real hit this year. But it's worth bearing in mind that even now, it's still above its long-run average of $1.18.
The trouble for the US is that when investors are scared, they retreat to the dollar. But just like every other nation in the world, the US wants a weak currency. It has this vague hope that after years of being a consumer-driven economy, it can export its way out of trouble. A plunging euro won't make that any easier.
In short, as Richard Grace at Commonwealth Bank of Australia told Bloomberg this morning: "Markets have to price for lower growth than they had previously." That suggests, as my colleague Dominic Frisby noted last week, that June could be a bad
And as we've been repeating for a while, that's why it's worth having your portfolio positioned defensively. Among the few assets to gain while everything else was falling, was gold.
This is partly a general 'flight-to-safety' trade. But it's also because of fear of what could be coming further down the track. As hedge fund manager Hugh Hendry told MoneyWeek magazine's editor-in-chief a few weeks ago, the 'end game' for this financial crisis is hyperinflation. First we'll see another major deflationary scare. That's what will give governments the excuse they need to crank up the printing presses to full blast, despite what the G20 said at the weekend about unwinding fiscal stimulus. And that's when we'll see inflation take off.