That was breath taking.
It looks like the pure fear that gripped the markets about an hour ago and dropped the Dow by 2% is subsiding. Stocks are still lower but the nosedive has subsided.
The fact that drop came so suddenly and on the back of good economic news was a striking demonstration of just how fragile the stock market is right now. It has been quite a long time since we saw the market respond that powerfully to vague rumours.
Lots of people aren’t even sure what the rumour was. Someone might default. CNBC reported that traders were talking about a “bank default.”
But we have bank failures every week. Why was this one sending traders to place sell orders? Well, some were saying that “a west coast bank” was in trouble. On the message boards, which are often populated by day trading trolls hoping to move markets, there was talk that it was Wells Fargo. Commenters on blogs pointed the finger at Citigroup.
Still others said it was a European bank on the verge of failure. One trader told us that this was a misinterpretation. It was, he said, Europeans who were whispering about a US failure. Specifically, the default on a Cerberus fund. That particular version of today’s scare story got so much traction, Cerberus was actually forced to issue a formal denial.
Regardless of the substance or accuracy of the rumour, the takeaway here is that we’re once again back to rumours trumping news to move markets. The fear trade is back on.