The Short View

By John Authers
Published: February 5 2010 (Financial Times)

It is almost like old times. Yesterday's global sell-off was as ugly as anything since the worst fears of the crisis began to abate last spring. The rebound that started this week has been swiftly forgotten. What happened?

There were probably two catalysts, one generated by markets, and another by data from the real world.

First, confidence in European governments' ability to repay their debts reached something of a tipping point, ushered there by a combination of the fears over Greece, a troubled auction of Portugal's debt, and mounting fears that Spain's much bigger economy appears to be in deeper trouble than either Greece's or Portugal's.

The credit default swap market suggests that such a tipping point has come.

Merrill Lynch points out that the implied default risk on Markit's index of five-year sovereign debt is now slightly higher than for comparable corporate debt - a remarkable finding.

Then came the latest news on employment in the US. Initial claims for unemployment insurance went up, against expectations. The data are noisy, and may be affected by the bad winter that much of the north-eastern US has endured.

But there were 6 per cent more new claims last month than in December. This is a great leading indicator and it is rising again. This was not in the script.

If the labour market is viewed in the old-fashioned way as a zero-sum game between labour and capital, this might be good news for share prices. But persistent high US unemployment would not be taken that way. Rather it would suggest that last year's bounce back in asset prices has not been enough to stir a lasting recovery in the world's biggest consumer.

Today's US payroll report, expected to show a small fall in joblessness, might change momentum again. But in this environment, a bad number could lead to grievous falls.