The US Firebreak

One thing I remember vividly from the economic crises of 1998 was the way that stock-market losses would chase each other around the globe, in a never-ending cycle. A fall in the US would precipitate a fall in Asia, which would cause a fall in Europe, which resulted in another fall in the US, and so on: it seemed that it was impossible to escape.

This time, however, it doesn't seem to work like that: Asia might react to the US (the Nikkei fell more than 5% today), but it doesn't normally feed through to Europe (flat today) or the US (which is opening a little higher, despite some gruesome unemployment-claims numbers).

Jim Surowiecki recently bemoaned the corrosive effects of "contagion, where selling in one market triggers selling in the next" -- but I'd be very interested to see some empirical data on that front. It seems to me that the US open is acting as a reasonably efficient firebreak, and rarely reacts in a knee-jerk manner to market moves elsewhere in the world.

If that's true, the reason is quite obvious. Asia is clearly susceptible to drops in US markets, and tends to follow the US down. But in 1998, we were going through what everybody called at the time "the Asian crisis" -- which meant that all eyes were on Asian markets, and that if they fell, everybody else was likely to sell off as a result. Whatever else the present crisis might be, it's not Asian, and market moves in Japan or China have negligible systemic implications for the US. And as a result, US and European traders simply don't care nearly as much as they did ten years ago what's going on across the Pacific.