While the market movements of the last couple of weeks have seen some extreme and uncomfortable moves, it could be argued that this highlights the extent to which markets have been buoyed by “stimulus activity” rather than fundamentals. Therefore, these recent moves are part of a natural market correction and should really not have come as too great a surprise – although it naturally hurts when markets move against you.
That said, in all of the current noise and amongst the heightened volatility and limited market liquidity, perhaps the most annoying element has been the relentless reporting about the so-called 'early removal of the quantitative easing (QE)'.
This may just be “jawboning” by the US Fed officials and any withdrawal or scaling back of QE will not be “early”, given that the US Fed has been actively supporting the market since December 2008 at the depths of the GFC. Remember it was stipulated that the tapering of QE will be “data-dependant” which should give markets some consolation and US Fed members were at pains late last week to highlight that “what we’re talking about here is a dialing back… the word exit is not appropriate here.”
Nonetheless, as is often the case, the market continues to over-react and is now also anticipating the first tightening by the Fed, which could still be over a year away. Aside from the Fed and the outlook for US interest rates, the steady evolution of the China growth (or rather cooling) story has become a major driver of our market sentiment as well. Any significant slowdown in the Chinese economy also has global ramifications.
In summary, markets are expected to remain very volatile in the near-term as we gyrate around economic growth revisions, currency fluctuations and interest rate hike expectations.
Happy new financial year!