What an interesting week we’ve just had in the markets. Six weeks after hitting new highs on global equities, we’ve just experienced a 10% correction. Meanwhile, this was supposed to be year global bond markets collapsed, but last week government bond yields were pretty much near all-time lows. (Meaning bond prices have been close to historical highs!) As I write this missive on Monday morning it’s not yet clear if we are going further down or recovering in stocks.
To those of us trained in classical market theory, record low bond yields and high stock prices simply don’t compute. A record high in stocks tells us the prospects and expectations for the global economy must be at an all-time high. Yet record lows on Government bonds say there is no inflation threat and low rates are desperately required to boost economic activity.
How can two such mutually exclusive poles of economic activity occur a mere six weeks apart?
How can markets be so mixed up in the outlooks signals they send us? The short answer is to give a shrug and acknowledge that is what these markets do – they re-access and re-price risk on a real-time basis.
If you read the headlines, then you’d get the impression it’s been a great year for equities – but that’s simply not true. They have been pretty much been treading water for the past year. The big gains were seen in 2013 when global stocks put on somewhere in the region of $18 billion dollars in upside value. This year, they’ve pretty much flat-lined – the crash of the last few weeks taking us right back down to near January levels.
Why did they rise so high?
Growth signals from the USA have been difficult to ignore. Even though US growth was literally frozen due to the polar vortex freeze last winter, the underlying growth has been edging towards the magic 4%. That gave folk the impression there was a good chance the whole global economy would be dragged higher.
Yet in the last few weeks we’ve seen a whole new series of doubts emerge. Firstly, we have heightened fears about Ukraine, the Middle East, Japan and the China slowdown. Secondly, we’ve seen global commodities slip and slide. The final catalyst was a succession of miserable economic data out of Germany telling us how much German exports and manufacturing have been hit by Russia sanctions. The result is that everyone is beginning to wonder just how much a myth the German economy might be, and if Germany is weak, then you can’t just stop worrying about the whole of Europe.
Suddenly the dismal prospects for the dismal continent of Europe have taken front and centre on every portfolio manager’s world view. While US growth might yet fuel global growth, it’s looking a distinctly vulnerable investment thesis while Europe threatens to go into a deepening deflationary spiral.
The only good news is out of Africa where prompt action by Nigeria demonstrates that properly treated and contained we don’t have so much to worry about Ebola. Who would have thought Nigeria would be teaching us about crisis management? Damn glad they have though!
What would it take to turn around the economic gloom?
Next month we’ve got the G20 meeting in Brisbane and great hopes that a global reform agenda – a “third arrow” approach to reform such as new trade agreements, cutting red-tape and tariffs will boost global growth prospects. Will it make any difference? The expectations aren’t enormous.
So where do markets go from here? Some punters think the correction in stock markets are a massive buying opportunity. I’m not so sure. It feels like we need some more evidence. So let them range trade until the breakout one way or the other.
Meanwhile, my trade of the week remains buy dollars, some more dollars and then yet more dollars.
Badger