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Investors Battle Fear, Fear and Fear

Thursday, 11 Aug 2011 | 4:03 AM ET

“Clearly we are in a selling climax,” says one CEO. "The biggest mistake you can make is to jump into any one asset because it is in favor. What you need is to be diversified."

The last two weeks have seen huge volatility in global stock markets as investors struggle to digest a huge number of economic and political developments. Overall, stock prices have fallen sharply.

In just 10 days investors have seen the US raise its debt ceiling just days before the August 2 deadline, a downgrade of US debt by S&P, ECB intervention in the euro zone bond market, huge losses for stocks, new record highs for gold and a promise from the Fed to hold rates at zero until 2013.

Those are enough developments to put investors on edge, even by the standards of the last four years, which saw the collapse of Lehman Brothers and much of the banking industry, as well as a sovereign debt crisis which has spread from Greece to much of the euro zone.

The Dow has fallen by more than 500 points in 3 of the last 5 trading sessions and speculation is rife that the Fed will be forced to undertake more unconventional measures to support the economy, while others are talking about the need for financial support for the global economy from cash-rich G20 nations like China.

“Clearly we are in a selling climax,” said Martin Senn, CEO of insurance giant Zurich Financial.

Senn is confident his firm could make a healthy profit in the current environment but says that, as an insurance company, he needs to have income against his liabilities.

“The biggest mistake you can make is to jump into any one asset because it is in favor. What you need is to be diversified,” he said.

Like Zurich Financial, analysts at Barclays Capital are refusing to panic.

“Despite the substantial price correction across all segments of financial markets in the past two weeks, with investors decisively adopting a risk-off mode, we are not inclined to change our asset allocation call,” Frank Engels, a European economist at Barclays Capital, said in a research note.

“We do not want to rule out a notable snap-back in risky asset prices in the very short run, as these assets are technically oversold.” “The (Federal Open Market Committee) announcement should help bolster sentiment for US and (Emerging Market) assets in the short run.

However, these are not 'normal' times and the medium-term macro and political risks remain high,” Engels said.

Others are concerned that plunging equity markets, combined with major problems like the euro zone debt crisis, could see growth grind to a halt.

“The recent drop in equity prices may have important repercussions for growth in both the core and peripheral economies.

Indeed, we estimate that the recent plunge in equity prices may have reduced the value of euro-zone households’ holdings by around 900 billion euros," or $1.28 trillion, said Ben May, a European Economist at Capital Economics.

Others are telling investors not to fight the flight to safety in the bond market.

“This volatility/unwinding spiral remains in full swing and investors care more and more about capital preservation than the return on their assets,” said Commerzbank analyst Marcel Bross.

“With recession fears intensifying and severe austerity measures in view across the board, 10-year Bunds may well be in for test of the August 2010 yield low at 2.09 percent: don’t stand in front of the train!” Bross said.

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