Tag Archives: Central Banks

Markets, you are getting very messy

Markets are living unusual situations since the beginning of the Great Crisis in 2007-2008. We are now living the 8th anniversary of the bankruptcy of Lehman Brothers. Since that moment, markets have been intervened by central banks (in fact) and their operations are not really free.

One of the chapters that we have recently lived is a “black swan”: Brexit in Europe has shaken the markets with a crash at the end of June and a continuous bullish trend in July. On the other hand, low volatility dominated the trading in August. For instance, volatility hit a 2-year-low in this month in Wall Street. Now, in September, investors tend to be negative and bears have taken their positions. In other words, markets are getting messy.

Evolution of developed markets YTD

What can we expect in the last quarter of this year? BlackRock head Russ Koesterich bets that the US election will hardly move the markets, either Clinton or Trump win. He proposes that market volatility can come from near elections in Europe, where populist parties are winning support amongst electors in several countries, even the most powerful as France or Germany.

Some investors are watching carefully the evolution in emerging markets. They are currently performing fine, mostly in Latam. Moody’s has recently raised the outlook for Brazil, Russia and China. If we look at the chart, we also find that Argentina is performing quite well after the change in the Presidential Seal.

Evolution of emerging markets YTD

But the deep discussion in the market operators is not about the influence of the politics, but the current bubble and overvaluation linked with what we mentioned at the beginning: the intervention by the central banks.

54% of investors requested by Bank of America Merrill Lynch in its Global Fund Manager Survey think that stocks and bonds are overvalued. This was also the perception before the dotcom crash in 2000. What does it mean? Are we near a new crash? Do markets experience a new “irrational exuberance” as Greenspan asserted in 1996?

We receive signals, because we cannot guess the future. The clear signal is that markets are not operating free: is it logical that several countries and companies are paying negative interests for the bonds? Is it logical that central banks keep their interest rates so low? Not at all, but the crash of this bubble can create a wave difficult to control.

Oil, gold and rates: something does not work in the markets

Performance evolution of the main world markets last year

Old civilisations believed that weird natural or astronomical events were signals of disasters or even the end of the world. A modern version of those myths could be the evolution of some financial references: oil, gold and rates. Their behaviours are far from being rational. Why? There is a lot of uncertainty and fear amongst investors.

Gold is the traditional safe haven in times of high inflation. This is not the case now, because we experience very low inflation or even deflation. The Depression that we have lived pressured the wages, something that have a direct relationship with the price evolution (in both as a production cost and consumption capacity). Why is the price of gold going up? Because investors buy the precious metal to preserve capital. Currently, there are not many options to obtain good performances: neither fixed income, nor equities (not to mention traditional products as deposits…). Gold is a way, at least, to avoid losing value.

Oil dropped in January to the lowest price for years: Brent was around 30 dollars. However, the market sentiment was not positive at all. The fall of the price was linked with excess of supply from several producers pumping and fighting for a largest market share that demonstrate suicidal. On the hand of demand, the economy does not grow as wished, mainly in Europe. Low demand, large supply: the traditional equation gives as a result a decline in the oil price. Usually, investors smiled, when oil reduced the prices, but it is not the case now. Prices are recovering around the 50-dollar threshold, but it is not enough to calm down the markets.

Finally, rates are in negative figures. The world turns upside down. Creditors have to pay debtors. German 10-year-bund has negative interests and Euribor is negative since 2014. The extreme would be that banks, pressured under the current situation, asked customers for fees or interests for their fixed-term deposits. Central banks intervention is creating a weird situation in which there are no rational behaviours in markets. Another sign is that wealth managers are holding more cash than ever since 2001 in their portfolios.

The Brexit poll, the uncertain US presidential election, China’s deceleration, the absence of strength in the European recovery… too many uncertainties. Investors are always frightened and money looks for security. Gold, oil and rates are indicators that markets are not working. What will be the solution? Will the markets recover their proper operation when central banks end the intervention? But when will they end it? Uncertain questions for an uncertain world.

Market outlook 2016: what to expect for the next year

December is time to analyse the results of our investments and look what may happen in the next year. What are the expectations, forecasts and outlooks for 2016?

Macroeconomics

Last IMF projections about the GDP assumed that global economy would grow more than in 2015. India, ex – Soviet Republics (except Russia), Mexico and the developed countries will head this positive evolution. China will grow, but at a lower pace. The worst results are for Brazil and Russia, where there will be a negative growth.

Central banks

Next week Fed meeting will decide about the possible rate hike after 10 years and some think that the US central bank have reasons to do it, as growth and employment are strong in the first economy. However, a rate hike could have negative effects for the dollar, as it would strengthen against the euro (possibly till the parity) and exports would be more expensive. What is given for sure is that the ECB and the BoJ will remain their dovish position due to the weakness of the recovery in their areas.

Stock markets

News are not specially good for US stocks, as several experts agree in a low growth or even return decrease in the S&P in 2016. On the other side, European stocks would outperform American ones, although analysts warn about the effects of a weak economic growth in 2016.

Bonds and commodities

Oil will still remain weak or even cheaper, if we take into account some forecasts. OPEC countries do not cut their production and US inventories are at the highest level. The downward trend is also sure for the rest of commodities, as Chinese lower growth will condition this markets, because the Asian giant will demand less.

What the bonds refer, there will be not much changes, as central banks will still maintain its current policy, apart from the possible Fed exception, whose possible rate hike will not have an enormous effect in the yields.

That’s the general market consensus. Of course, life is always open and there can be surprises that can move more positive or negative: the next US president election, the evolution of Daesh and the Syrian war or any outrageous predictions that Saxo Bank typically publish at the end of the year… hopefully, none of them happen.