Good day and welcome to July! It was another volatile week in the markets but green this time, with most indices finishing positively and receiving some much needed ground. In the US and Europe most indices finished the week up almost 2%, while the Hang Seng in Hong Kong pushed boundaries reaching almost 4%! After the initial reaction to the wind down of stimulus by the US FED which shocked the markets, the FED was eager to get back on their microphones and start highlighting the outs and loop holes that we mentioned in last week’s Money Matters. In short, the markets didn’t like the initial statement that the FED may look to reduce stimulus, and after the few days of sudden drops the FED came back out to calm some concerns and reiterate some of their alternative options that perhaps weren’t stressed enough during the initial minutes.
In addition to the FED announcement, the People’s Bank of China came out shortly afterwards and announced they were going to tighten credit lending in order to ease concerns about too much ‘cheap money’ as well as reduce the credit risks that have been a growing concern around China financials and property. This was a similar scenario to the US, with Asian markets falling on the initial news, but then the POBC came back out to say this would be done in a prudent manner which eased market concerns. In turn, this then saw most Asian markets bounce back. And, this is just hot off the press! An article just came in ranking the top 1000 global banks of which 4 out of the top 10 belong to that of China, including the number one spot with ICBC bank. Now this is just a ranking and doesn’t tell us about outlying factors, but it does seem to indicate a shift in the trends with more and more emerging banks climbing the ranks.
Here’s some food for thought. There was last week’s announcement by the FED which caused panic in the market, only to then have markets recover most of their losses following the FED’s counter as well as the scenario just recently in China with the announcement to tighten credit lending which also shocked the markets in Asia, and again was followed by statements to counter this, which also resulted in a partial recovery for most Asian indices….. So, does this make the recent announcements less important considering the end results were almost a non-event? Or does it help indicate the direction markets want to go?
A lot of investors have recently been affected by the broad drops in almost every asset class across the board. However, with the rather broad based positive rebound last week, this should help make some of those previous questions easier to answer. For those investors who were looking to profit take, they should be happier with this rebound, while those investors looking to get into the markets should feel a bit more comfortable that some of the volatility has subsided.
But where does this leave us from a bigger picture point-of-view? It’s hard to say with everything that’s been going on, but here’s a few things we know now that we didn’t a few weeks ago:
1. That the US FED is still very wary/intimidated by the markets, and either way, it’s likely the FED will stick to the market’s time frame and not their own.
2. In addition to the US, China and other countries are also looking to slow down their stimulus measures sooner than expected but seem to realize this will need to be done cautiously.
3. Positioning and diversification will be more important as political intervention can easily push fundamentals to the back seat.
For many assets, fundamentals have taken a leave of absence and although they’ll be back, it’s unsure if they’ll return in the immediate future. Gold for example has been moving in correlation to the markets when historically it tends to hedge against it. In addition, even with the FED easing market fears with continued stimulus for the short term, gold hasn’t seen much of a bounce. It’s not unusual for fundamentals to be pushed aside during certain periods but fundamentals always return, so just be aware of any short term impacts and movements, and keep the bigger picture in mind.
And, going back to some of the rebounds we have seen, while most equities have started to slowly rise again, commodities such as oil and industrial metals remain in low demand. This said, don’t give up on these assets or regional countries driven by a resource based economy. With fundamentals waiting to make their return, it’s likely going to be important to watch quarterly earnings to be reported over the next few weeks. The ECB also meets on Thursday this week so we have another round of political attention that could impact the markets. The ECB president Draghi is usually pretty adamant on saying he’ll do whatever it takes to keep the EU economic zone going, so let’s see how this pans out in market terms. Most importantly, continue to be diversified and maintain a balanced portfolio while we ride out market volatility.
For Austen Morris Associates’ investors – talk with your advisor about any repositioning to take advantage of markets at this time. For more information about Austen Morris Associates please visit our website.
Darren Cox
Co-Head of Portfolio Management
Austen Morris Associates Wealth Management & Investment Team
www.austenmorris.com
