Buckle up


The roller coaster ride continues, considering the increase in volatility measures over the past few days, the reaction in the equity market one could say had, so far at least, not been fully reflected. However, after Thursday’s move, one could say we may be a bit closer, as US stocks closed in what is termed as correction territory. The S&P 500 has given back almost 3 months gains, the FTSE 100 almost all last year’s gains and the Stoxx 600 likewise. That is quite a retreat. Donald Trump’s take on the recent move was an interesting one as he claims the sellers are wrong and markets should be celebrating the good economic news. He is, of course, talking his own book, but, may never have heard the saying, the good economic news is often not such good news for shares. We must remember that equity markets have been rising on a tide, as if not bad news, certainly indifferent news, over the past few years.

Mark Carney and the Bank of England raised the spectre of more interest rate rises during the year, the betting is now on May for the next move. The Bank raised their growth forecast for the UK economy this year from 1.5 to 1.7%, now slightly below what is forecast for the year ahead for the euro area. The Banks ability to forecast anything has been poor, and whereas the ECB remain convicted to negative rates, despite the recovering economy, this is in contrast to the Bank of England’s position. Sterling had a good day as the inflation report led to rises against both the dollar and the euro, however giving back some of those gains towards the end of the day.

It will be interesting to see what the fund flow data looks like in the coming days. Will record inflows of a few weeks ago be met with record outflows after the pain of the first few days?  The global economy grows over time, the trouble is we just get a bit ahead of ourselves for a while.

This bull market correction has had the characteristics of previous tops. In 1987 traders were coining it in for a while selling volatility. This time the investment banks made it a bit easier for them to do this, but the result was the same. 1994, the expectation rates might rise quicker than the market focused caused pain in both bonds and equities, rather as now. 2000 investors did not care what premium they paid for tech and ignored valuations in the old economy. As we quoted the other day, history may not repeat itself but it does rhyme. Just remember the great thing about equities, you get paid to wait.

Posted on February 8, 2018 .