What is roiling global markets?
Traders in the world’s major financial markets will not want to remember the first week of the final quarter. But the strong moves into negative territory did not start only this week and I believe it has little to do with the end of the third quarter, although this may have postponed the dive somewhat.
Signs of an impending correction are everywhere and predictions of a major correction feature in the majority of reports I gloss through on a weekly basis. But as all traders know, realising what is inevitable and timing the resultant occurrence, are two entirely different facets of investing. For months, I have been hearing a correction in the order of 20% will happen before the end of the year. Then again, just as a counterpoint, there are the (now fewer) mavericks who believe leading markets have not seen the end of their meteoric rises, not yet in any case. I have to admit these voices are growing thinner and fewer, but that they are still there, is a fact.
The gyrations in major markets do not concern me that much. After all, I do not have a nest egg based on US, European, Japanese or Chinese securities, and local legislation restricts the offshore exposure of local institutional investors. What grabbed my attention is that for the past three weeks, against all odds and in the face of much turmoil in a dozen or more localities, markets seem to have ignored, or at least priced in, most of the current bad news. From any logical consideration, the turmoil should have started long before the end of the quarter.
I have also noticed that the usual see-saw between capital market and equity markets, seems to be absent, or not manifest yet. Despite large daily moves in the Dow Jones, the S&P 500 and the Nikkei 250, the capital market space did not become overcrowded, and rates remained relatively stable. Typically, when equity markets reel from investor flight, capital market reflect the move of money, almost immediately. It has not happened this week.
Even my favourite celebrity analyst, Nouriel Roubini, in a commentary published earlier in the week, was at a loss for the apparent blind-eye markets turned to international upheavels, until about a week ago.
He stated in a very analytical way what many other less-astute analysts have been saying for a long time. There is a complete disjunct between market performance (equities) and economic fundamentals. While the world’s developed economies are bankrupt to the bone and indebted to the hilt, the equity markets are exploding as if everybody is suddenly rich.
It is impossible to say with some degree of accuracy, which way the major indices will go. If I look only at Thursday’s trading, investment conditions indeed are gloomy. If I consider the period last Friday until this Friday, it is even worse. But if I look at index movements over a year, a rather startling picture unfolds.
I have always regarded the FTSE 100 as one of the most stable indices globally.
There are a number of reasons for this but I presume the most important are the depth of both the London capital and equity markets, the overall maturity of the listed companies, and also, the overall maturity of the London investment industry. As regular as clockwork, when the FTSE approached 6800 index points, once can expect it, in due time, to revert to a more reasonable 6400 or even 6300.
The FTSE 100 is arguably the world’s most stable index. And this is where it becomes disconcerting, and if my pet index for stability is sending out a strong message now, it is that we must still expect carnage in American markets and especially in Tokyo.
By Thursday this week, the FTSE was up only 0.1% on an annual basis. That is not a typo – one tenth of a percent. The Dow, y-o-y, was up 11%, the S&P 500 a massive 15%, and the Nikkei 250 not far behind, also up 11% yoy. If my FTSE indicator is correct, and assuming that there is much room for even the FTSE to correct some more, it simply means the other markets have lots of catch-up to do on the south-facing slope.
The general talk amongst traders is a cautious speculation on the direction and tempo of US interest rates. Everybody knows this except, seemingly, the traders who are prepared, prompted by their investors, to push prices weekly to new lofty heights.
As we say in Africa, What goes up must come down. The big economies are not less bankrupt than what they were seven years ago, instead I believe they are all running on borrowed time. The trick is to figure out, how much borrowed time.