If it's October there must be a crisis looming. Back in October 1998, the Russian debt defaults, as well as the bankruptcies of some of China's investment trusts, sparked fears of a domino effect encompassing all of Asia and Latin America.
Markets were jittery, share prices were volatile and corporate spreads were wider. The IMF announced that it would provide additional short-term credit facilities for countries that pursued approved IMF policies, although most dealers were sceptical about the lasting impact this would have. People were worried and experts were calling an end to bull markets.
Last year it was US Federal Reserve Bank chairman, Alan Greenspan on the exposure of the banking system to stock market falls -markets were volatile again, as this time investors worried about higher rates and wider corporate spreads and, although there wasn't a full-blown economic or political disaster looming, there was a general feeling of unease about the stratospheric levels of the new technology stocks and a real level of concern that some people would get seriously burned before the year was out. (Timing is everything, of course!)
This year the October crisis is stark - politically the Middle East is a tinderbox and economically the price of oil is becoming a major headache for Western economies. Equity markets have had a terrible year, corporate spreads are - you guessed it - wider, the telecoms and technology companies are being pasted and it's not a question of being burned in the future, it's a question of how badly you're being burned now.
Although most people look at equity markets for direction, the corporate bond market (where companies issue debt) is a particularly good indicator of levels of confidence. Which is why they get it in the teeth every time people begin to worry about the long-term prospects for the markets.
While this month's initial sell-off hit the telecom and technology sectors (and that in itself can't be surprising to anyone), credit concerns have begun to leak into other sectors too. Many corporate bond spread indexes - which show how much more companies pay over governments for long-term debt - are now close to their widest ever levels. When times were better, those corporate spreads were very tight and companies in some sectors weren't paying very much more than sovereign governments for their borrowings.
Worrying for the market, too, is the fact that bank paper has begun to widen, mainly as a result of the perceived exposure that many of them have to volatile and highly-borrowed sectors like telecoms. If Greenspan was worried last year he should be twice as worried now and not just because rumours of heavy losses from junk bond trading decimated Morgan Stanley Dean Witter's share price last week. The bank has said that trading income was "eroded" because of volatility in stock markets, which is a nice way of saying that they bought lots of high-yield paper which, unfortunately, they now can't sell for love nor money.
As I've mentioned before, the high-yield market (and it's not always junk, sometimes the companies concerned are quite efficient) can entice institutions into buying paper that gives them a return much, much higher than boring government paper. But high yield means high risk and, when something goes wrong, it's always the high-yield market that tumbles.
Additionally, it looks like banks in the US will be showing more losses from syndicated loans as well as the corporate bond market. This is where a group of banks get together to lend money to a particular company. Syndicated loans are big business and usually very profitable, but reports that losses have more than tripled over last year haven't helped the financial sector either.
Although attention was mainly focused in the US, the announcement by the Halifax that it intended to pay 4 per cent interest on current accounts saw bank share prices tumble in the UK as well. Paying interest on current accounts has never been something that banks see as a good thing and the equity market feels the same way since the estimates are that it'll cost Halifax £50 million. It'll be interesting to see whether it'll achieve its chief executive's target of doubling market share, given that there's a wide acceptance of customer inertia about moving accounts because it's just so much hassle.
Nevertheless, a price war within the UK financial sector will still take second place to the over-riding economic concern about oil prices. The International Energy Agency is predicting a rise in demand over the next few months and the level of stocks is significantly lower than last year. Of course, last year's oil prices were nearly half of what they are now, which is why the oil-producing countries cut back production in the first place.
And those countries don't particularly want to see oil prices collapsing back to the $15/$19 dollar per barrel prices that we've seen before. So they're hardly likely to sanction significant production increases, even if those were currently possible.
That being the case it's hard to see how markets can get an upward boost, at least during the autumn and winter months, unless interest rates start to come down again. The Fed might think about it but the ECB certainly won't.
Which provides further headaches for that foot-in-mouth specialist, ECB president, Wim Duisenberg, who managed to imply that the ECB had finished intervening on behalf on the euro. Actually, he wasn't really saying that, he was responding to a question about the ECB's reaction to Middle Eastern events and what its response would be if (if - you mean when!) the euro weakened as a result. Wim, trying to be even-handed and helpful, rightly said that the ECB wouldn't intervene simply because of those events, but the market decided that they'd sell the euro anyway and see what the ECB thought about it.
The ECB's president was being particularly naive if he thought that his remarks would be taken in context by any foreign exchange dealer. I wish that central bankers wouldn't try to take on markets as some kind of macho thing. It's not clever, it's not funny and it doesn't impress anybody. But then it's a long time since the ECB managed to impress anybody anyway.
