Volatility has collapsed over the summer months with the standard deviation of returns on the S&P 500 running at well below half the normal level. This is not to say nothing has happened. Brexit negotiations are proceeding painfully slowly. This is scarcely a surprise but political commentators and insiders are becoming disheartened by the calibre of many of those in the Cabinet. Such are the complexities of the task at hand, it would tax the very ablest. Worryingly, many of the current crop of British politicians are firmly from the second division.
Events in the Korean peninsula are serious but we should not forget that North Korea has been a nuclear nation for almost a decade. However unpleasant, the world needs to learn to live with this threat. If America had any good means to deter North Korea from pursuing its nuclear programme, it would have surely used them already. The biggest risk we face is from an overreaction, but as I wrote here
, even ratcheting up the war of words is counterproductive. The DKK has an agenda and this clearly does not involve thermonuclear war. Even an impetuous set of sanctions could do far more to damage international trade than this tin pot country warrants. Let us not forget that Kim Jong Un spends less on feeding his people than Americans lavish on their pets.
Trump's antics and frustration reflect his failings in handling the reins of power. He risks going down in history more as a dead parrot President than a lame duck one. He must win a success. Doubts are now growing about tax reform, though the market is still expecting that the ex Goldman's duo of Messrs Cohn and Mnuchin can get these moving. Troublingly, it feels like Trump has been losing senior staffers at a faster pace than contestants from 'The Apprentice'. Any hopes that Trump will make supply side reforms to lift the growth rate are now for the birds. There are pluses though to Trump's impotence. Let us hope that his vaunted trade protectionist policies will also fall to the wayside.
Regardless of these distractions, the world economy is doing better than expected. A small upgrade to growth in China and a sizeable one in Europe is reinforcing the synchronised global recovery. Continued weak wage growth and tepid inflation is a mystery given the decline in the unemployment rate. The Federal Reserve looks set to tighten rates further and begin to draw in QE. Carney has prepped UK markets for a rate rise. Draghi in Europe is facing increasing pressure to taper QE. Only in Japan is the monetary foot likely to remain on the accelerator.
Despite the quiescence of the headline indices, there have been some big moves within markets. Provident Financial suffered one of the greatest declines of a FTSE100 company on record. Markets are being brutal with any company that faces the threat of being 'Amazoned'. The mere whiff of this caused Dixons Carphone to be marked down 25%. Amazon is so named because it is river that is continuously swelled by tributaries resulting in a giant. This company is already a monster and it continues to grow at a staggering rate. We should not underestimate the profound implications of the revolution that many businesses face.
The summer's calmness in the bond market was punctured by Carney's comments on interest rates. In a single week, the 10 year gilt lost the equivalent of 3 year's coupon income and the 50 year linker plunged 16%. Many investors still see the government bond market as a secure harbour. We see the eye watering valuations and the index's sensitivity
to interest rates to be as safe as Blackwater Bay filled with wildfire.
Carney's comments also perked up the pound but the story in the currency markets has been the weakness in the dollar. So far, the dollar has had its worst year for more than twenty years. Markets are pricing in a slowing in the Fed's programme of interest rate rises, whereas the ECB is poised to take its foot off the monetary accelerator. The dollar may not have reached a bottom but it must be close and it is beginning to feel increasingly oversold.
The growth in the global economy is beginning to feel more robust and its impact is becoming apparent in EPS. This has caused us to consider whether we should persist with our cautious stance in equities. Technically, there are several indicators which hint that this is not the time to do so. These include the composure of markets, the growing confidence of investors (viz the Michigan Consumer Confidence survey) and the narrowing of markets. The technical implications of the wall of money being funneled into the ETF market could exacerbate any problems.
We are at the foot of a rate cycle that is clearly on the turn. There are many doubts about the efficacy of Quantitative Easing but there are few about the programme's impact on asset prices. It is hard to imagine that the removal of the programmes will have anything but the opposite effect. At least we can expect their withdrawal to be very gradual and hopefully offset by continued decent growth.
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