Are markets oversold?
Since the start of the week UK blue chips have lost almost 10% of their value, and across the pond US stocks lost 4-5% on Thursday alone.
On Monday the FTSE 100 opened at 5815 and by Friday lunchtime it was wallowing around 5261, after crashing through the 5300 mark in morning trading.
The catalyst for such a vast sell off was the culmination of weeks of uncertainty surrounding the debt conditions in the eurozone and the US.
A lack of decisive action from policymakers did little to help the situation, which meant that even after agreements were reached confidence didn't return.
But is all this hysteria truly warranted, or is it a classic case of the baby being thrown out with the bathwater?
David Buik, city commentator, said: "Markets are ridiculously oversold. The banking sector is under the cosh, but we have actually seen a slew of earnings that have been extremely good and positive.
"There's no question we have issues and falling growth, the news is not good. But the hysteria by analysts and the media is exacerbating the problem. Coupled with inadequate politicians and it makes an extremely toxic cocktail."
On Friday financial stocks were among those hit hardest by a pre-nonfarm payrolls sell off, with Barclays and Royal Bank of Scotland down over 6% and 8% respectively.
Both banks had issued interim results earlier in the week which showed the impact of both the payment protection insurance scandal and the Greek banking crisis on their balance sheets.
So as investors awaited the opening bell on Wall Street, comparisons with the 2008 financial crash were already being made.
A return to 2008?
But David Miller, partner at Cheviot Asset Management, said: "This is no re-run of 2008. This is the next stage of the credit bubble.
"While the headline numbers are alarming we should all take a deep breath and remember the fundamentals are much better than 2008; banks are stronger, companies are generally in good shape and traders are less heavily leveraged."
A look at the core tier one capital ratios of the banks that reported this week certainly shows they are in better shape than in the months before the crisis hit.
In its first half results Lloyds Banking Group's core tier one capital ratio was 10.2%, Standard Chartered's was 11.9%, Barclays' was 11%, HSBC's was 10.8% and RBS' was 11.1%.
Under the Basel II capital requirements put in place following the crisis, banks should have at least 6% of core tier one capital.
Mike McCudden, head of derivatives at Interactive Investor, said: "With the banks being caught up in the double whammy of PPI fines and eurozone exposure they have been taken to the slaughterhouse, but bargain hunters will be at the ready."
Long-term, analysts at Nomura and UBS think Lloyds is a buy, but are not bullish on RBS or Barclays over the same timescale. HSBC is seen by many as valued at a premium and although its global exposure helps diversify risk it also means there is a breeding ground for inefficiencies to develop.
Looking at other sectors, Buik cited the traditionally defensive plays of tobacco and utilities as a good bet and after its positive update yesterday, he also favours Unilever.
For stocks that will allow you to sleep at night he recommends Royal Dutch Shell, Centrica and BP, for their "cracking dividends".
Has the market bottomed out?
Louise Cooper, market analyst at BGC Partners, is hopeful for a recovery in the stockmarket: "A relief rally is completely normal after days of falls and at some stage expect one - in general, markets do not move either up or down in straight lines. However, a short, sharp (upwards) shock does not mean we are off to the races."
McCudden said the return of buying appetite could come sooner rather than later if the nonfarm payrolls are anything better than terrible.
He said traders are looking to the NFP for more bad news, but it is already priced in at the current levels. So if they surprise to the upside there will be a sharp bounce in equities regardless of the situation in the eurozone.
Specifically talking on the FTSE 100, he added: "We saw a brief test of the support level 5200, which held fast. Expect some resistance around 5340 and 5400 on the way back up."
This article was taken from our sister website, Interactive Investor.
Payment protection insurance is designed to cover you should you fall ill, have an accident or lose your job and can’t make repayments on loans or credit cards. However, research by consumer watchdogs found the cover to be overpriced, filled with exclusions (policies exclude self-employment, contract employees and pre-existing medical conditions) and were often mis-sold because the exclusions were never fully explained. In May 2011, the High Court ruled banks had knowingly mis-sold PPI and ordered them to compensate around two million consumers.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).