George Lucas
Markets are in turmoil. But why?
“The answer depends on which way you want to look,” says George Lucas, managing director, Instreet Investment.
“There is a raft of reasons being thrown around by market participants as they try to get their head around what is causing the selloff.
“In reality, the selloff is probably being caused by a combination of the following factors:
- OPEC’s inability to cut oil output and the falling price of oil
- sovereign wealth funds selling equities
- the selloff in Chinese equities and fears the Chinese may devalue their currency
- the US Federal Reserve raising rates in the current environment
The fact the US equity market has rallied with no major pull backs since 2009 - negative rates in Europe
- the recent move by Japan to take their rates negative
- signals of a possible recession from the bond markets as yield curves flatten
- the increase in bank regulation reducing liquidity in the market.
“We should probably also throw currency wars into the mix along with the over-reliance on central banks (rather than fiscal policy) for economic management.
“Interestingly, the slump in equity prices seems to be largely detached from economic reality. Although there remains the possibility that the turmoil will drag down economic activity, recent numbers are not pointing to a recession.
“Retail sales in the US increased 0.2% m/m in January despite a decline in the value of gasoline station sales due to lower prices. This is better than expected. Excluding autos, gasoline and building materials, control group sales were up 0.6% m/m. The December retail numbers were also revised up.
“What’s more, consumer confidence in the US is holding up well even while the equity market is slumping. The University of Michigan’s measure of consumer confidence fell to 90.7 in February, from 92.0 in January.
“As for the Euro-zone, the 0.3% fourth quarter gain in GDP came as something of a relief after the weak tone of recent data and business surveys. The numbers show that Europe did not slow down in the last half on 2015 and there are no signs of recession at the moment.
Commodity rout
Before all this was dominating the headlines, it was the rout in commodity prices that had people’s attention. But reassuringly, there has been relative stability in the prices of commodities during the last few weeks.
With demand for safe-haven assets up, precious metals (led by gold) have surged. Industrial metals have also held up well and the price of Brent crude oil is still above its January lows, despite slipping back recently.
Pressure on Japanese equities
Recent strength in the Japanese Yen has sent vibrations through the local stock market amid fears it will erode corporate profit growth and derail the government’s efforts to get rid of deflation.
The surge in the Yen has raised expectations the Bank of Japan will take action to weaken the currency. They have the option of direct intervention; or they could cut interest rates further; or they could step up asset purchases again.
The Yen will likely remain strong while market turmoil continues and any further rises in the Yen will contribute to volatility.
We do, however, expect the Yen to fall back of its own accord as safe-haven flows reverse.
