Markets tumble as fear reigns

• Fear drives markets lower

• Gold and yen strength highlight risk-off sentiment

• Biggest challenge to markets since 2008

The fear surrounding global financial markets has been cranked up further today, as risk assets once more took a battering in favour of defensive plays. The continued deterioration in the FTSE is as much to do with the ongoing fall in oil and USD/JPY as the outlook for the UK economy itself, yet with markets in freefall, who is going to argue with a trend?

The strong rally in gold highlights the fear that currently permeates through financial markets, as the metal regains its crown as the top physical investment in the face of heightened uncertainty, rising almost 15% since the turn of the year.

Another big risk-off play is that of yen strength, which has seen USD/JPY drop over 8% in two weeks. The strength in the yen is driven to a large extent by the unwinding of carry trades which play upon the reliably low interest environment in Japan. As the yen appreciates to reflect this flight back to safety, the Japanese stock market is hurt by the perception that its export market will deteriorate. As long as the price of oil keeps falling and the yen keeps dragging the Nikkei lower, there is the expectation that European markets will continue to suffer.

Interestingly, it is clearly a case that people expect the stock market to lead the economy, as murmurings around a potential global recession are coming at a time when the economy and job growth remains relatively robust. There was a palpable feeling that markets overrun themselves in the past when bursting to new all-time highs off the back of monetary policy stimulus. However, in the face of a monetary policy withdrawal it seems the confidence that underpinned investor sentiment is nowhere to be seen. This is not another credit crisis, nor a dot-com crash. However, it is clear that we are seeing the biggest crisis of confidence since the height of the 2007/2008 crisis. This is despite the fact that the past eight years have seen us battle through significantly more testing issues than are currently being faced (e.g. fiscal cliff, Cyprus, Greece, withdrawal of QE, US government shutdown). Ahead of the open we expect the Dow Jones to start 297 points lower, at 15,607.