Analysis: Europe markets shaky

Markets are still vulnerable to bad news, financial experts say

By CNN's Charles Hodson

LONDON, England (CNN) -- Don't pay too much attention to recent modest gains for European stocks. These markets are nervous, fragile and all too ready to focus on bad news.

Friday was a critical day for equity investors everywhere: The U.S. non-farm payroll numbers, a key indicator of the state of the labour market, showed a net loss of 199,000 jobs in September, way higher than the consensus forecast of a loss of 110,000 jobs.

There was plenty of room for error, though: Economists were unsure how to interpret the fact that the data were based on a survey conducted in the very week of the terror attacks on New York and Washington.

Even though the unemployment rate stayed steady at 4.9 percent, there is no mistaking the United States' ever-faster slither into recession.

As Paul Donovan, senior economist at UBS Warburg, put it: "What's happening is that consumers are worried about losing their jobs, and if consumers worry about losing their jobs, they spend less money -- so the economy slows down, so they lose their jobs -- it's a vicious circle."

And that vicious circle, says Donovan, will most likely mean a sharp rise in U.S. unemployment in October, with the rate peaking at 6 percent or maybe 6.5 percent -- a level not seen since the 1980s.

The prospect of the world's economic mainspring ticking ever slower does dampen spirits at a time when European markets were just beginning to regain their poise after weeks of volatility.

Paul Mortimer-Lee, who leads the market economics team at BNP Paribas, says markets are still vulnerable to bad news "whether it's further terrorist incidents or bad news in terms of activity or profits."

Mortimer-Lee says investors are reluctant to come back into the marketplace until they see more evidence of economic recovery on both sides of the Atlantic, and that caution is holding back trading volumes and liquidity levels on equity markets.

Markets are also looking to central banks to take more action, though some say they have been too slow to react to the prospect of global recession.

UBS Warburg's Donovan singles out the Bank of England for criticism, pointing out that even after this week's quarter-percentage point easing, the UK has the highest interest rates and the lowest inflation in the Group of Seven industrialised nations.

In this confused and nervous atmosphere, minor items of good news are all too often dismissed as mere blips. Friday's revelation that German industry actually booked an increase in orders in August drew only a heavy sigh from market-watchers.

"Look at next month's data -- then you'll see how bad things really are" was a typical response -- and a remark that aptly sums up the mood on markets this weekend.