A lot has been made about the Espirito Santo problems in Portugal and its effect today on stocks. There’s a large element of that in the moves today, on the fear of contagion and a stark reminder that there are still big financial landmines waiting to be stepped on.

In itself the Espirito issue shouldn’t be a big deal, afterall the ECB and EU have been bending over backwards to backstop and secure the system from these types of shocks. In one aspect this should be the perfect test for the new rules and multitude of EU tool acronyms. The Espirito problem is only around €2.55bn, if the very worst were to happen. That’s not an awful lot in the grand scheme of things and should be easy enough for the Bank of Portugal to manage.

The big issue for the current stock moves is that we’ve suffered some big losses since the start of the week and that suggests something bigger is afoot.

Currently since Monday we’ve been down the following;

  • FTSE -3.24%
  • Cac -4.03%
  • Dax -3.97%
  • Ibex -5.26%
  • FTSE Mib -5.97%

That’s some sizable moves.

I mentioned on the stock close post yesterday to be careful that yesterday’s modest reversal could very well be of the dead cat variety and so it has proved.

So what is the real reason behind it?

It could naturally be a normal refresh of the market that’s been on a tear these last few months. My other thought, which is a long standing one but probably far to early to get any real confirmation of, is that stocks are finally waking up to reality.

I’ve droned on for 100’s and 1000’s of pips of gains that prices will have to adjust to the fundamentals and it got to the point where even I started to think that this was just the way it was and nothing was going to change. Maybe now there’s some realisation that the QE punch bowl is really about to dry up and the free lunches are coming to an end.

In October the Fed QE is likely to end in full. They’ll be no more cheap money that needs to find a home. Stocks prices will now solely have to rely on the company fundamentals, and at the moment that’s not looking too good, especially in Europe.

All these high prices will have to be justified by what goes through company coffers and if the market decides that the share price and the accounts don’t match, there’s only one true end result.

We are coming to a very big juncture in the crisis. The ECB aside (and maybe the BOJ), the major central banks have pumped and pumped and that’s coming to an end. Economies are going to have to learn to stand on their own two feet again. Central banks have been the training wheels for the economic bike and now they are coming off.

If it is happening we are going to see some very big adjustments, not only in stocks but across the board. There’s copious amounts of liquidity that has been pigeon holed for a few years now, it’s going to be drained and what’s left is going to be looking for a new home. That home is going to be where the fundamentals are strongest. That is how things worked before the crisis. If economies are going to try to get back to normal then the markets will have to as well and that’s going to mean a serious amount of chop.

Some moves are not going to make any sense, like the dollar’s reaction to improving US fundamentals, but we at ForexLive will try to guide you and our trading accounts through it as best we can.

Many have said prices have been an illusion covering the reality underneath, maybe they’re right.