The year has begun on a tumultuous note. The Nikkei, DAX and S&P 500 all gapped lower the first day of the year. However, heightened anxiety has calmed as the fire appears to have burnt itself out, and equities have moved higher over the past two week.
The US S&P 500 closed above 1950 for the first time since January 6. Global equity markets are broadly higher in response. At the same time, ahead of the G20 meeting, the world’s second and third-largest economies have signaled additional stimulus will be forthcoming.
A confluence of factors is raising anxiety levels among investors, expressed in heightened volatility. The S&P 500 was turned back yesterday from the key 1945 level, and global equities are falling today. The over-production of oil is set to continue. Saudi Arabia denies intentions to cut output and the Iranians scoffed at suggestions of freezing output.
API reported another large rise in US crude stocks. This points to upside risks on the 2.4 mln barrel-build consensus estimate in today’s official Department of Defense report.
The US dollar and yen remain firm. The ramifications of Brexit continue to weigh on sterling and the euro. After nearing $1.4050 yesterday, sterling could not move much above $1.4150 before sellers re-emerged. The euro, which came close to $1.10 yesterday, was sold into about half a cent bounce. It marginally extended yesterday’s decline, slipping to almost $1.0990.
The main driver of the investment climate is not so much the incremental economic data as the capital markets themselves. The market turmoil contributed to the tightening of financial conditions, which in turn heightened risks, which monetary officials are committed to resisting.
Financial markets stabilized last week, but the tone remains fragile. The damage to the technical condition and sentiment requires further consolidation to rebuild investor confidence.
Global equities are beginning the last week of February on a firm note. The MSCI Asia Pacific Index rose 0.75%, with China’s markets gaining more than 2%, leading the way. European shares have followed suit. The Dow Jones Stoxx 600 is up 1.7% near midday in London, led by materials and telecom. Like the MSCI Asia-Pacific Index, the Dow Jones Stoxx 600 is flirting with last week’s highs.
After a terrible first several weeks of the year, global capital markets stabilized in the past week. Chinese markets re-opened after the extended Lunar New Year holiday and proved not to be disruptive.
Chinese equities did not decline to catch-up to the performance of global markets in its absence and instead gained 3% on the week. The offshore yuan appreciated during the holiday, and the onshore yuan strengthened to converge with it. It traded in a narrow range after the markup.
Investors have become unhinged. The increased volatility and dramatic market moves challenge even the most robust investment strategies. This sets off a chain reaction of money and risk management that further amplifies the price action, like an echo chamber. Then a cottage industry of reporters, analysts and bloggers offer explanations often without distinguishing the initial sound from the echo.
The outlook for the dollar in the week ahead is not about economic data or the FOMC and ECB minutes. It is about the stability of the global capital markets.
Many are looking for an event or official action that will stop the rout that is of historic proportions to start the year. We too have been thinking about what it would take to stop the rot. However, none of the frequently mentioned events, like an agreement to cut oil output, or for a coordinated policy response by the major countries, is particularly likely.
More investors are running away from stocks and seeking safe havens as job data weakens, signs of a recession intensify, and Janet Yellen reverses her bullish position on the U.S. economy. Gold hit its 1-year high on Thursday while U.S. Treasury prices continued to soar as investors crowded into both assets to escape an increasingly volatile stock market.
