The markets had been hoping the US Federal Open Market Committee would be able to pull a rabbit out of its hat. It seems to have pulled out a bear instead. The offending phrase, from the FOMC announcement, was the reference to “significant downside risks to the economic outlook, including strains in global financial markets”.
The slowing of the world economy is old news, given the steady deterioration in the purchasing managers’ indices. On Thursday, the flash manufacturing PMI for China for September showed a contraction, while that for the euro zone shows both services and manufacturing contracting, for the first time in two years.
The new threat, however, is the risk to the financial system in Europe. IMF has said that European banks could face potential losses of as much as €300 billion as a result of the crisis in sovereign debt in the region. Unless the authorities get their act together, a long, slow train wreck is in the offing.