November Risk-On?

2 mins. to read

So we made it through September and October without a crash. This is great news for punters (if not the spreadbet firms!) as statistically, these are the top two months of the year for the markets in terms of crashes across the globe.

With so much macro-economic dislocation; the Eurozone crisis, the American fiscal cliff risk, the slowdown in China, the Japan/China face-off…the list is enormous and that’s without even mentioning the Middle East yet!

Yet, despite of all of the above, somehow the markets have managed to put in a pretty decent return for the year so far – certainly in the US and, to a lesser degree here in the UK. The disasters have been selected Southern Europe, Japan and China – areas that this magazine are tipping to be outperformers next year – such is the way of market dislocations – what are major underperformers one year and certainly when 2 or 3 years in succession, generally outperform the subsequent year.

The unprecedented monetary stimulus and negative real interest rates in the UK & US are the primary reasons for the buoyancy in markets and also the lack of any real volatility this year as the VIX pays testimony to. This combination seems to have done the trick so far.

Now, in November we have 2 major events which will set the global macro-scene for some years to come. Both are political, the once in a decade change in China and the American election. Now Obama is a strong favourite to win in the US and an incumbent win is traditionally good for the markets as it signals stability – the markets hate instability. Both 1998 and 2004 were years ending on a high in the US after an incumbent win (Clinton & Bush).

In China, the news is bound to be more opaque, but by the 15th of November we will know which of the political clans have taken over. Already, with the downfall of the Bo’s who were leaders of an old communist, left wing element, the signs are that the new leaders will be strong and relatively reformist. Again this should be good news, firstly that there is a stable handover and secondly that economic reform and growth will continue.

A third event of less global impact will be the Eurozone approving a further Greek bailout on 12th November; recent statements by French and German ministers suggest this will happen. So another piece of can kicking to delay the euro-crisis coming to a head looks to be in order.

The year-end nearly always sees a Santa rally in December, but perhaps this year the political events will create an earlier momentum, leading to possible big index gains at points in November before the Santa rally – in contrast to the historical record as detailed in this blog –

Mind those shorts and watch those risk-on assets for big price movements when the opportunity to bank profits are presented.


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