What's plaguing the world's share markets? The easy answer is that it's the ecomomy, stupid.

Fears that the US is heading for a steep downturn and, indeed, may already be in recession have undoubtedly battered sentiment. So, too, has the worry that the rest of the world cannot keep cantering along while the world's most powerful economy lies in bandages.

But share prices have already discounted most, if not all, the likely bad economic news. Even allowing for a couple of thin years for profits, company valuations are starting to look low and share prices quite cheap.

Something else is at play here. Traders are not only looking at economic fundamentals. They are also worried that a nasty financial shock — the failure of a big financial institution for example — could wrongfoot them and send markets tanking much further.

The collapse of a bank, insurer or large hedge fund is not impossible. Balance sheets are so opaque and the derivatives the world now trades are so complex that it is very difficult to value positions accurately and impossible for outsiders to know who might be in trouble.

Counterparty risk, i.e. where one company in a joint agreement may default, is the big issue. And it has been underlined most recently by the declining fortunes of monoline insurers — companies whose sole business is to underwrite mortgages — that investors traditionally rely upon to hedge against bond issuer defaults.

The result is a reluctance to do business with any but the most rock-solid of institutions.

It's not just the macroeconomy that is making investors so jittery.

Explore Markets

• United States

• Europe

• Japan

• China

• Russia

• The Gulf

• India

• Africa

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive