January was not supposed to be like this

I was going to write about the emergence of the Bitcoin today, but I think with the events of the past few days, perhaps it would be better to have a quick comment on capital markets instead, and save Bitcoins for another day. The FTSE 100 fell 1.5% on Monday, a couple stock specific events contributed to the fall. Vodafone fell at one stage over 6% as AT&T declared they have no intention to make a bid, after they were asked to make a formal statement by the Takeover Panel. That announcement precludes AT&T from making an approach for 6 months. BG stock fell by almost 15% after it once again revised its production guidance, and further warned about ongoing issues in Egypt. The decrease in market cap for both BG and Vodafone accounted for approximately a third of today's FTSE 100 fall. 

The FTSE 100 has now given up over 4% in the past few trading days, and having been at the top of its 6 month trading range, is getting close to the bottom of it. Both the FTSE 100 and the S&P 500 closed near to their 50-day moving average; traders will now be looking at this to offer some support. After the recent fall, the FTSE 100 has made very little progress in the past 7 months despite a much-improved domestic and global economic outlook.

The next event to focus the investors mind will be on Wednesday, as we will hear from the Federal Reserve as to whether it will taper the bond purchase program by another $10bn. On the one hand the fact that the US bond market has not really reacted to the first taper may encourage the Fed to withdraw another $10bn, on the other hand, the recent emerging market concerns may persuade them to postpone any changes until the following month. Despite the US unemployment rate falling close to the target 6.5%, with inflation remaining under control, in my view not much would be lost by waiting for a month to see how the events of the past few days pan out before making any further changes to policy. On reflection they may decide the broader emerging market issues are not directly related to Fed policy, and therefore they should not be deterred from their intended path.

I wrote at the start of the year the fear was in bonds and the greed in equities, so far in the month of January equity markets in the US and UK have fallen about 4%. In turn bonds have rallied, UK and US yields have fallen back to 2.75% for their respective 10-year government debt, from 3% at the start of the year. So it proved once again when others get greedy it is time to get fearful, and visa versa. The fear and greed index has risen again today and is now close to 20. As one can see from the chart below, over the past year that was enough fear, and subsequently equity markets calmed down again, we shall see if this occurs again this time.

1 year VIX vs S&P 500 and FTSE 100. Source: Google Finance

Posted on January 28, 2014 .