A broker talks on the phone in a trading room of a Portuguese bank in Lisbon, Thursday, July 10, 2014. Share prices on the Lisbon stock exchange fell more than 4 percent and Portugal's bond yields ticked higher amid growing concern about the health of one of the country's largest financial groups.FRANCISCO SECO/The Associated Press
If the stock market jolt on Thursday left you shrugging, you're not alone.
That's because the source of the initial selloff was trouble at a Portuguese bank you've never heard of; the dangers to the economy didn't warrant a peep out of the European Central Bank; and the hit to North American stocks merely sent major indexes back to where they were several days ago.
Indeed, as market turbulence goes, this was tame and served just one purpose: It suggested that when something does go wrong, investors aren't going to sit on their hands in the hope that the situation will clear.
The day's worries began after the parent of Banco Espirito Santo SA missed debt payments due to accounting concerns.
Banco Espirito shares fell an alarming 17 per cent before the country's regulator stepped in and halted trading in the bank – Portugal's second largest lender but small by global standards – feeding comparisons to the worst days of the euro zone's debt crisis a few years ago.
But some context is needed here.
Concerns about Banco Espirito go back to late last year, prompting a decline of more than 50 per cent in its share price since April. Before Thursday's dip, the shares traded for a mere 61.5 euro cents, making the latest setback look like a continuation of a problem rather than the start of something new and terrifying.
"Admittedly, this event alone might not necessarily be a big deal," said Jennifer McKeown at Capital Economics, in a note.
The broader fallout was more alarming simply because there was a broader fallout.
Yields on Portuguese government bonds shot higher as bond prices fell, dragging in the debt markets of other European periphery nations, such as Greece.
Portugal's benchmark stock market index fell 3.7 per cent amid a wider European retreat. Italian stocks fell 1.9 per cent, Spanish stocks fell 2 per cent and even German stocks fell 1.5 per cent.
The jitters spread to North America. The blue-chip Dow Jones industrial average fell as much as 180 points in early trading, putting it on track for its worst showing in three months. (It rebounded later in the day, closing with a decline of just 70.54 points.)
Investors rushed into typical safe investments, such as U.S. and German government bonds, and gold jumped nearly $20 (U.S.) an ounce initially.
The moves looked worrisome largely because they disturbed a remarkable calm that has defined markets this year. The S&P 500 has hit successive record highs in 2014 without a significant stumble in months or an official correction in about three years. European stocks have rallied 60 per cent from their lows during the sovereign debt crisis in 2011. The CBOE Volatility index – or VIX, a so-called fear gauge – fell to seven-year lows in early July, reflecting few worries on the part of investors.
And, incredibly, the market has begun to view some of the once-wobbly looking European government bonds as rock-solid.
Consider that Spanish five-year bonds are yielding less than comparable Government of Canada bonds; and the yield on Portuguese 10-year bonds have fallen below 4 per cent (even after Thursday's rise) from a high of 17.4 per cent in 2011.
No doubt, something will shatter the calm.
Banking turmoil is never good news, especially in a region with a delicate economy.
But there are plenty of other potential sources of market mayhem that pose a more serious threat right now, such as the health of the Chinese real estate market, the unwinding of U.S. monetary policy stimulus and hefty stock valuations.
If trouble arises, Thursday will offer a useful template for what will follow. Sell first, ask questions later.
David Berman