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Four most worrying drags on global markets

Four most worrying drags on global markets

The global stock rout appears to have come out of nowhere, but Capital Economics highlights four key weights dragging on markets.

Signs of a renewed downturn in Europe, particularly Germany, are the most worrying drag on markets, Julian Jessop, an economist at Capital Economics, said in a note Tuesday.

Read More Can banks, tech earnings halt Wall Street's carnage?

"It is hard to see any solution that does not involve additional easing by the ECB (European Central Bank) and further euro weakness in the coming months," he said.

Last week's manufacturing data from European growth driver Germany disappointed, with industrial output slowing by 4 percent on-month. The country's economy contracted 0.2 percent on-quarter in the second quarter, with the potential to fall into a recession in the third quarter. In the euro zone as a whole, gross domestic product was flat in the second quarter, lower than expected.

Read More The Dow's correction has more room to move

European shares were resilient in Monday trade, with the FTSE 100 (FTSE International: .FTSEE) ending up 0.4 percent and the Xetra Dax (XETRA:^GDAXI - News) adding 0.3 percent, but since the beginning of September, they are down 6.6 percent and 6.9 percent respectively. In the U.S., stocks tanked Monday, with the S&P 500 (CME:Index and Options Market: .INX) falling 1.7 percent for a total 7 percent drop from its bull-market high.

Oil Prices

The second drag on markets is the collapse in oil prices (New York Mercantile Exchange: @CL.1), but that is less worrying, Jessop said. The price of WTI crude oil has fallen more than 18 percent from its mid-year high, trading around $85 a barrel.

Read More Cheap oil is here to stay, at least for a few months

"The collapse in oil prices overstates the weakness of world economy," he said, attributing the decline to weak demand from Europe and China as well as increased supply, dollar strength and some panic selling. "Whatever the reasons for the fall, lower energy costs should actually help to kick-start global growth," he added, noting he expects oil prices to recover a bit toward $93 a barrel by year-end.


The next nagging concern is "essentially old news:" the slowdown in the major emerging markets, Jessop said, noting most that of that took place in 2010-2012 and was expressed as a decline in industrial metal prices.

"A lot of the bad news for commodity prices - especially metals - is now surely priced in," he said, adding that while growth in the largest emerging economy, China, may have fallen below 7 percent in the third quarter, it would still be a decent and likely healthier pace.


The final major concern comes under the big geopolitical risk umbrella, including Ebola fears, Jessop said.

"The bulk of these worries are overdone, but again it could be Europe that provides the biggest shocks," he said, citing the rise of euro-skeptic party UKIP and the potential for a referendum on the U.K.'s membership in the EU.

Jessop isn't alone in pointing to Europe as the biggest market concern.

Potential deflation there is a major worry, Matthew Hegarty, an equities analyst at Perennial Investment Partners, told CNBC.

Read More Stocks to rally after 10% correction: Pro

"The outlook for Europe now really is contingent on pretty decisive action from the ECB," Hegarty said, but he noted that the ECB is following the Federal Reserve's lead and seeking unconventional policy tools, which should help support stocks.

To be sure, Capital Economics noted that even if these fears fade soon, markets' focus will likely return to the looming prospect of policy tightening from the Federal Reserve.

"This should see Treasury yields (U.S.:US10Y) resume their upward trend and keep market volatility generally high," Jessop said.

-By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1

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