The Japanese stock market has dropped over 7% overnight sparking a wide-ranging sell-off across Europe.
It's not surprising really because the recent bubble in European indices had no relationship with the underlying asset and fundamental value of the companies behind them.
Trading in the last couple of years has been led purely by market sentiment and technical trading - in other words greed and fear. As stock markets moved higher they fuelled a greedy rush by speculative traders to ride the rise. Short sellers dared not enter the market.
The bubble in stock markets must not be confused with economies and recovery.
Only this week the International Monetary Fund said that despite recent improvements in some indicators of economic growth, the economy is still a long way from a strong and sustainable recovery.
“Recent data suggest some improvement in economic and financial conditions, which is encouraging. But the United Kingdom has a long way to go. Investment has been persistently weak and unemployment, especially among young people, is high,” said David Lipton, the IMF’s Deputy Managing Director.
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