Blink and you missed last week’s turmoil on the financial markets. On Wednesday, billions were wiped off share prices; on Thursday and Friday they were wiped back on. The FTSE 100 index ended the week higher than it started. Just a bout of new year jitters? Can investors now settle back and enjoy a period of calm?

Probably not. It is easy to laugh, or groan, at markets’ ability to swing from gloom to optimism, but volatility tends not to appear out of thin air. Take a step back from this week’s excitement and remember that London’s blue-chip index has lost about 1200 points since its closing peak of 7104 in April last year. The factors driving that 17% decline are unlikely to disappear quickly. Last week’s brief panic suggests investors fear it wouldn’t take much to intensify the pressure.

The first ingredient is the oil price. In theory, low prices – transferring wealth from oil exporting countries to oil importers – are good for global growth because consuming economies tend to spend their gains more readily. But the process is neither mechanical nor instantaneous.

The immediate effect of lower oil prices is cuts in investments by oil companies. Some $400bn (£280bn) of projects are reckoned to have been cancelled or delayed in the past year. Further down the economic chain, airlines can afford to delay investment in more efficient planes when fuel is cheap. That all represents activity removed from the global economy. Corporate earnings, taken as a whole, could fall before cheap oil relubricates the engine.

Second, there is China, where 2015 saw the slowest rate of economic growth for a quarter of a century. A rate of 6.9% (if one trusts the official data) still looks slick when viewed from the west; what’s more, it’s what the Chinese authorities had modelled as they attempted to encourage consumption to replace an unsustainable level of spending on infrastructure.

But how is that Chinese growth being generated? If the explanation is merely larger helpings of debt – in an economy assumed to be riddled with bad loans and loss-making steel makers, shipbuilders and other state-backed enterprises – that is not sustainable either. In the meantime, confidence has been dented in Beijing’s ability to keep all the balls in the air. The handling of the upsets in China’s own stock market has veered from naive to farcical.

A third factor – less obvious, but critical to big investors’ mood – may be the US Federal Reserve’s quarter-point increase in interest rates at the end of last year. Central banks – especially the Fed – were the handmaidens to the post-2009 recovery in stock markets as their quantitative easing and cheap money forced down bond yields and drove investors into riskier investments. A first increase in US rates since 2006 was meant to signal the moment when the US economy, at least, was strong enough to leave the hospital ward.

The problem is that the rest of the world may not be. There may be $1 trillion of dollar-denominated loans in China, for example. That limits China’s ability to devalue the yuan – but a devaluation may yet be seen in Beijing as the lesser evil, if growth slows further. A serious devaluation, as opposed to the baby steps taken so far, would re-set the terms of global trade, probably with grim consequences in the rest of Asia.

There are, of course, many reasons to think calamity will not happen. The International Monetary Fund cut its global growth forecasts this week but still expects 2016 to be stronger than 2015. The Fed could ease pressure caused by a stronger dollar by delaying further rate rises; already Mario Draghi at the European Central Bank is dropping hints that he could step up quantitative easing in the eurozone. Cheaper oil should, eventually, raise spirits among the winners. The muddle-through thesis, then, is definitely alive.

But the alternative – a serious global slowdown – no longer looks such an outside bet. Expect more wild days for share prices.

Shell’s white elephant?

Oil workers in Aberdeen will be watching events in the Hague this coming Wednesday as closely as anyone.

They will be hoping that some miracle occurs so that Dutch and other international investors in Shell suddenly swing against the £35bn merger with rival BG that is coming up for a final vote.

Ben van Beurden, the Shell chief executive, will almost certainly win the day and that could result in many Scottish oil workers being sacrificed in a blitz of job cuts needed to justify the tie-up.

Europe’s biggest oil company only needs 51% of the votes and, while the City has generally grumbled about it, only one well-known shareholder, Standard Life, has pledged to vote “no”.

The agreed takeover was hatched when the price of Brent blend was sailing along at over $60. Now that it is down to half that level, the deal does not really make sense.

Shell argues the cost of crude will bounce back soon enough. Even if that is not the case, then a package of measures to cut combined costs will ensure that the deal is “value-enhancing”, as the corporates like to say.

Shell has already slashed 500 jobs in the North Sea, an area that is the highest-cost oil province in the world and will be an easy target for further savings. The oil giant has promised to cut 10,000 jobs this year worldwide and sell off £20bn of assets from a combined entity.

Most investors in Shell have decided to believe Van Beurden. Why? Few want a public row with such an illustrious name as Shell and some will have an investment banking arm making a fortune out of the fees for arranging this buyout. They may also own BG shares and therefore the deal balances out for them.

But a lot of it is just inertia. It is the corporate equivalent of a white elephant, like the HS2 rail line or Hinkley Point power station. Who wants to create a fuss, properly crunch the numbers and stand in its way?

Sterling slide



While everyone watches the equity markets, the pound is quietly falling out of bed. Sterling has dropped 7% in trade-weighted terms in just two months. That’s a fall only surpassed once since the monetary policy committee took control of UK interest rates in 1997, say economists at investment bank UBS. So what is going on? The economic signals, from weak retail sales to falling factory output, point to an economic slowdown. But nothing dramatic enough to justify such a sell-off in the pound.

The Bank of England has hinted at interest rates staying on hold for the time being, just as its US counterpart starts to raise borrowing costs. But again, this only goes part way to explaining sterling’s slide. It leaves one obvious culprit: Britain’s looming EU referendum. With polls tight, expect more pressure on the pound as the Brexit vote approaches. It’s good news for embattled exporters, but not so nice for holidaymakers.