Bad news for markets at the moment, but good news for rates…
The Reserve Bank of Australia’s Assistant Governor (Financial Markets), Guy Debelle caused quite a stir with comments he made in a speech last Tuesday. His suggestion that volatility is too low, that markets are under-pricing risk and that “the sell-off…could be relatively violent when it comes”, has struck a chord with many, especially following the recent sharp drops in global stock markets.
A blend of poor US economic data (most notably retail sales), further global growth scares, the war in the Middle East, the standoff in Ukraine, street protests in Hong Kong and the spread of the Ebola virus have combined to push markets materially lower last week. The common denominator across bonds, equities and currencies, led by a scramble by investors to the safe-haven of US Treasuries, has been “liquidation” or “capitulation’ (that is, “get me out of here….sell right now!”). Guy Debelle's warning last week to the effect that “when everyone rushes for the exit they may find the door extremely narrow” will be ringing in a fair few ears at the moment.
Despite some stability returning to markets last Friday, bond yields are at one year lows and equity markets have all but wiped out gains made so far this year.
One positive out of all this is the fact that any talk of an official cash rate increase has been deferred, with rates staying low for some time now.