After what felt like a period of consolidation for equity markets, Wednesday saw American markets once again retreat sharply, leading to falls in Asia and then into Europe on Thursday morning. Equity markets remain very fragile as concerns continue over the state of the global economy, and as the oil price continues to fall. Equity markets had started the day on Wednesday on a far brighter note as Chinese import export data for the month of December came in ahead of expectations. This mood seemed to be depressed as oil inventory data reported a rise. The fate of oil and equity markets remain correlated it would appear. As much as the oil price helps the consumer, a fall of this nature does impact investment and capital spending and therefore broader economic growth.
RBS have been setting headlines recently, talking of a cataclysmic time ahead for investors that could see equity markets fall by up to 20%. The precis of their argument is that equity markets have been propped by central bank liquidity and this is coming to an end.
If equity markets are due a 20% correction, which they well may be, cataclysmic feels a little dramatic, and 2008 felt cataclysmic. It is worth remembering the FTSE 100 has corrected by more than that from the peak last year, and many developed markets close to 10% down from their highs. Equity markets do wobble a rates start to rise, but historically often recover, as the year progresses.
Late on Wednesday the release of the latest Beige book survey, according to the Wall Street Journal, recorded most regions are seeing modest growth, with few signs of wage inflation.
Hardly a day has gone by this week that has not seen a member of the Federal Reserve speak. On Monday Lockhart stated that he believed there was not enough evidence for a further rate hike in the first quarter. He did remain optimistic the consumer will continue to drive the economy. Dallas Fed member Kaplan believes that four rate hikes this year “not baked in “. Another member Charles Evans, “remains nervous “over inflation and China. The latest of the members to speak this week, the St Louis Fed Chair James Bullard, described the fall in oil prices as “substantial” and that it may have an impact on Fed policy. However he took the view that the falling oil price was overall positive for the economy. The theme definitely appears to be coming through, after December’s decision that the Federal Open Market Committee are in no rush to go again.
The Bank of England announced on Thursday that there will be no change to UK interest rates, to no surprise. The vote remained at 8-1 as Ian Mcafferty remains the lone wolf. JP Morgan helped sentiment a little during Thursday beating analyst expectations with their 4th quarter earnings announcement. As much as oil has dominated the recent market moves, the upcoming earnings will be just as influential.