Connoisseurs of submarine movies need no introduction to the classic The Hunt for Red October. A real-life version of the film was happening in Sweden this week, where reports of a mystery submarine in its waters echoed the plot of the 1990 spy thriller.
For participants in the equity markets "red October" is also a well-known condition. Since 1928 there have been 36 corrections in the S&P 500 in October. The average fall is 4.7%, and this year the market dropped by 5.6% at the peak.
October is also known for its more spectacular falls: Black Monday (1987), Black Tuesday (1929) and Black Friday (1929) all took place in October. The exception so far is Black Friday (1869), which occurred in late September.
Black Wednesday is missing from the list, and although this denotes that day in September 1992 when Britain withdrew the pound from the European Exchange Rate Mechanism, and George Soros "broke the bank", it is not a general term for a market collapse.
On Wednesday we came close to the combination of a sharp decline in share prices and a "flash crash" in US bond yields. But as October draws to a close, not only have global equities gained on the month, but the S&P 500 is also testing previous record highs.
Exit QE
The market turmoil in October has many mothers. A major reason lies in the fear of the consequences of an end to the US Federal Reserve's quantitative monetary program (QE3), under which the Fed has been buying government and mortgage bonds.
The programme is being terminated at the end of October. At the end of the previous QE1 and QE2 programme, markets fell sharply (S&P 500 fell by 16% following the end of QE1 in 2010 and 18% after QE2 in 2011).
The US economy has moved in a positive direction since QE3 was initiated, and there are no longer valid arguments for supporting financial markets with artificial intervention in the bond markets. But again this year, markets have had problems with this withdrawal of liquidity. 
At its October meeting the Federal gave a more optimistic interpretation of the outlook for the US economy than has been seen for a long time. Therefore, one must expect that the Fed will slowly move its communication so that it will prepare for a rate hike that will probably arrive in Q2 next year.
For financial markets, the absence of the daily dose of QE talk may provide more volatility than we have been accustomed to in recent years. Similarly, higher interest rates and a stronger dollar could put pressure on a number of speculative positions (see also my previous comment here).
From an overall financial perspective, however, the first baby steps towards higher rates are not a problem.
Exit Europe
The euro-area economy has matched the pace of the US through the last decade. In fact, industrial production increased more than in the US until 2008, then fell somewhat in 2008-2009, before repeating the pattern until 2011. From the autumn of 2011, however, US production increased by 11% to a new historic record level, whereas in Europe it declined by 3%, and again in recent months we have seen a renewed relapse.
This perspective is necessary to understand the depth of Europe's problems. 
The surprise this year is not that Italy is back in recession or that the French economy looks as comfortable as a crème caramel on a sieve. The surprise is Germany, not least the collapse of the industry over the summer. This is in other words not a repeat of the debt crisis of 2010-2012, as many otherwise suggest.
The German crisis illustrates that Germany, and Angela Merkel, has peaked and that Pax Germanica - as the equity strategist Christopher Potts has proposed - has collapsed. The acceptance of fiscal tightening as a miracle cure is gone.
At the national level, this is difficult for Germany, and Merkel remains to show that she can do more than say nein to Francois Hollande. At a European level, it is more than difficult. Merkel has dominated a fragile alliance of economic policy makers, where she back-stopped euro-zone government debt almost single-handedly. But the policy did not work, not even in Germany itself. Because of that there is no longer any consensus on what economic policy should be in Europe.
Enter ECB
The European Central Bank (ECB) is trying to compensate for the lack of political decision-making power, but it is a Sisyphean task. Formally, we have gotten more from the ECB during the last few months than we expected. The problem is, however, that the ECB's monetary base continues to fall. Monetary policy works partly when central banks push money into the banking system. When the monetary base decreases the likelihood of that happening is small. Rate cuts, when we are already close to the zero-bound, does not work at all.
When the monetary base falls, it illustrates also that the problem is not the money supply, but demand. Demand for credit is weak because growth is weak and because we live in the aftermath of a debt crisis, where many are trying to strengthen their balance sheets (through savings). According to PIMCO, the asset manager, the private sector in the euro-zone borrowed EUR 1,200 bn per year in the period before the crisis. Today, it net repays loans of 700 billion. The recent proposal to buy corporate bonds will help lift prices in the secondary market, but will have a negligible economic impact. The same applies to the idea of government bonds, something that many are still calling for.
The way forward lies in a restructuring of the banking sector, where last week's stress test is a step forward, and in much-needed economic reforms. Until we see the results of which Europe will be the global economy's sick aunt.
The Girl from Ipanema
In Brazil Dilma Rousseff regained the presidency with the least possible margin. The country fell into recession in the first half of the year, and the prospects are not bright in the short term. A persistent inflationary pressure has led to renewed increases in interest rates, and an absence of a much-needed deregulation of the economy has led many investors to lower expectations for a country that would otherwise have every opportunity to flourish. Stock markets have fallen sharply this year.
A different, more positive vibe is felt in India after Prime Minister Modi’s arrival this year. Also Indonesia has changed leadership recently, and also here there is reason to hope for better times. In China, many still fear a hard landing, but my assessment is that we are witnessing a controlled but necessary slowing of growth. Finally, there are signs of recovery in Japan after the spring's tax-induced distortion.
The picture of the global economy is thus mixed at the moment and there is room for many interpretations. On an overall level, growth is decelerating somewhat, but most likely this is a short-term decline in the industrial cycle, which will be followed by increased growth in 2015.
Investment conclusions Last month I recommended a shift down in risk, mainly through a reduction in the allocation from overweight to neutral, but also through a cut in the allocation to high-yield bonds. The timing was acceptable, though in light of the recent risk-on recovery not strictly needed. I recommend maintaining a more neutral stance until we can see with greater clarity whether the economic downswing is short-term or prelude to a deeper downturn.
The Q3 earnings season is in full swing, and though regional differences exists, on a global scale corporate earnings seem to be growing at a healthy high single-digit clip. Combined with a still supportive monetary policy cycle, equities should remain the asset of choice, but in the near-term QE-withdrawal angst and a deeper than expected downturn in Europe may keep asset returns low and volatile.
I remain bullish on the dollar and favour US equities. 
To subscribe to the Daily Shot letter by e-mail please enter your e-mail address here: Subscribe to the Daily Shot