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"The report is headed The Calm Before the Even Calmer."
Markets calm, and then things turn tranquil
• DON STAMMER
• THE AUSTRALIAN
• JUNE 10, 2014 12:00AM
Investment returns. Source: TheAustralian
HOW is the mood and performance of investment markets in the first five months of 2014 best described?
Relevant words that come to mind would include placid, low volatility, stable, tranquil, benign, calm, balmy, storm-free, unruffled, stoical, relaxed and serene.
What a contrast with the “normal” state of investment markets, which is more often described as volatile, choppy, moody, uncertain, changeable, fitful or — in the vogue phrases of recent years — as swinging frequently between “risk-on” and “risk-off”.
In fact, the tracks that investment markets, here and abroad, have travelled along recently are noteworthy in at least two ways: returns across the main asset classes have been unusually steady and remarkably uniform.
The Philo Market Monitor refers to “the incredible calmness in financial markets” and adds: “Volatility has not been this low since the middle of the last decade. In 2014 markets have drifted up quietly and after five months to the end of May, just about everything is up by a neat 4 per cent.”
Moreover, this has been at a time when investor sentiment might have been spooked by one or some combination of negative influences: sharemarkets in most developed economies have been looking a bit expensive; Europe is at risk of slipping from low inflation to deflation; China’s property market and banking system remain stressed; Russia’s extraordinary actions to destabilise Ukraine; worsening tensions in the Middle East; and the contraction in US GDP in the three months to March.
In my view, there are several reasons why investment markets have been so calm and why bonds and shares, which often move in opposite directions, have produced similar — and positive — returns.
The dominant one is investors have become even more confident that the US, Europe and Japan will all maintain lax settings in monetary policy.
While the US Fed is expected to phase out its program of bond purchases, investment markets seem increasingly confident that, with US inflation running at 1 per cent and a lot of slack still in the labour market, the Fed will further delay any increase in its cash rate — and then go about making only small and drawn-out moves as it “normalises” short-term rates.
In Europe, there’s a risk very low inflation will morph into deflation. To stave off deflation, the European Central Bank recently announced a further cut in short-term rates (including setting the key rate it pays on deposits from commercial banks at negative 0.1 per cent to encourage banks to lend) and moved a step closer to buying asset-backed securities from banks).
Japan’s money base has been increased by 50 per cent in the past 12 months, on course to its doubling over two years. Another factor that has helped investment markets to stabilise and to show positive returns across the main asset classes is that average expectations for world growth in 2014 have been trimmed to about 3.5 per cent — a rate that’s seen as too low to threaten inflation but high enough to allow some increase in aggregate profits.
Also, there’s been a decline of 60 per cent from last year in net issuance of US bonds in line with the shrinking US budget deficit.
In my view, US growth will pick up as the effects of the extreme winter are unwound, the inventory rundown is completed and the recovery in average house prices flows through into confidence of American households.
Should this occur, sharemarkets are likely to benefit somewhat and bond markets are likely to resume the weakening bias they showed over 2013.
It’s an unusual set of influences on investment markets. As the Philo Market Monitor points out: “Almost all assets in the world are overpriced thanks to unprecedented money printing by the major central banks.”
But they’re not expecting these money taps to be turned off soon. The report is headed The Calm Before the Even Calmer.
Don Stammer is an adviser to the Third Link Growth Fund, Altius Asset Management, Philo Capital and Centric Wealth. The views expressed are his alone.
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I think it's normal before world cup and olympics IIRC, usually coupled with european summer holidays. Usually low volume 4 weeks but watch the direction during the sports month as an indicator when people back from hangover.
Before you speak, listen. Before you write, think. Before you spend, earn. Before you invest, investigate. Before you criticize, wait. Before you pray, forgive. Before you quit, try. Before you retire, save. Before you die, give. –William A. Ward
Think Asset-Business-Structure (ABS)