Volatility returns as markets face the end of easy money


July 09, 2017 11:49:56

After what seemed a pretty volatile week, equity markets ended going pretty much nowhere.

Solid jobs numbers on Friday pulled Wall Street up to an overall marginal gain over the week. Europe was a bit stronger too. The ASX lost ground, although looks likely to open higher on Monday.

Markets on Friday’s close:

  • ASX SPI 200 futures +0.2pc at 5,661
  • AUD: 76.05 US cents, 67.70 euro cents, 58.98 British pence, 86.61 Japanese yen, $NZ1.04
  • US: Dow Jones +0.4pc at 21,414, S&P500 +0.6pc at 2,425 NASDAQ +1pc at 5,656
  • Europe: FTSE +0.52pc at 7,350 DAX +0.1pc at 12,389 Eurostoxx50 +0.1pc at 3,464
  • Commodities: Brent oil -2.9pc at $US46.71/barrel, Gold -1pc at $US1,212/ounce, Iron ore +1.4pc at $US62.972/tonne

Sentiment was largely driven by the view that central banks were confident enough now to tighten up the loosest monetary policy the world has seen since the epic debasement of the denarius by a succession of Roman emperors a couple of millennia ago.

The RBA is playing a bit behind the beat and was still firmly “neutral” last week.

A tightening should normally be embraced as a sign various central banks believe economies have enough momentum to grow out of their post-GFC funk.

But these are far from normal times and markets have become addicted to the easy money splashing about.

Mixed news in US jobs data

US jobs growth supports the theory the extraordinary close-to-zero rates and quantitative easing are doing something.

Although it could be added that US economic growth remains uninspired and inflation almost non-existent.

Non-farm payrolls rose an unexpectedly strong 220,000 in June. More people were encouraged to look for work, pushing the unemployment rate up a tad to a still low 4.4 per cent.

Not everything was so rosy.

Wage growth was disappointing again. The May figure was revised down to barely 2.4 per cent over the year and the June figure needed a decent rounding up to get it to 2.5 per cent.

As Societe Generale’s Omair Sharif pointed out, there was little to cheer in the industry breakdown either.

“In fact, the three largest sectors by their share of aggregate hours worked in the economy posted weak average hourly earnings figures in June,” Mr Sharif noted.

It didn’t change the betting the Federal Reserve will push ahead with a third rate hike this year.

However, given stagnant wages, the market believes the pace to “normalisation” will be unrushed.

Should we be worried by the bond sell-off?

Another way of looking at it is, it will take a lot to turn back the flood of concocted central bank money that has hit the global economy.

The Big Four central banks — US, EU, Japan and UK — have injected around $US14 trillion in the global economy in recent years. Make that $US19 trillion if you tip China’s state generated liquidity in the pool.

No one is talking about turning off the taps any time soon, just turning them down a bit is the humble ambition.

Central banks will continue to buy bonds by the billion for some time yet. It will just be at a slower pace, or “tapering” as it is called.

The idea is central bankers will cancel the trillions of long-dated bonds they’ve bought as they mature, thus running down their bloated balance sheets. That is still way off in the future.

But markets are all about momentum. The slightest hint of a slowdown is enough to spook big investors, who then spook small investors.

The action in the bond market where yields jumped as institutional investors sold out — which in turn spilled over in equities — is a symptom likely to continue.

“Bond yields continued to rise partly in response to the minutes from the last ECB meeting which indicated it considered dropping its easing bias, but decided against it because it might trigger a tightening in financial conditions — which of course has happened anyway,” AMP’s Shane Oliver noted.

“The first ‘taper tantrum’ in 2013, which was kicked off by then Fed chair Ben Bernanke’s comments around slowing or tapering the Fed’s quantitative easing program, saw share markets fall 6-to-11 per cent and 10-year bond yields in the US and Australia rise by around 140 basis points.

“However, we remain of the view that the latest taper tantrum will settle down.”

Equities to remain volatile

The ASX’s 0.3 per cent slip last week was hardly cataclysmic.

“After strong gains and signs of investor complacency, shares and bonds have been vulnerable to a correction for some time,” Dr Oliver observed.

Minack Advisors’ Gerard Minack says his best bet is that the Fed’s tightening will pressure long-end yields, which points to moderately lower equity valuations, particularly in defensive sectors.

“In terms of what out-performs, I expect that the rest of the world will continue to do better than the US, in common currency terms,” Mr Minack says.

“And I expect sector leadership will be shared by industrial cyclicals and financials.

“I think the resource sectors — energy and mining — are not likely to participate in the broader cyclical out-performance,” he said.

US and Canada central bankers will be the focus

There may be a few more insights into the pace of tightening when Fed Reserve chair Janet Yellen fronts Congress again for her regular testimony/grilling on Wednesday.

From a historical point of view, it may be Dr Yellen’s last visit to Congress as the Fed’s boss.

The Fed’s voting members are not exactly in lock step if the minutes of their latest meeting are any guide.

With internal debate going on, any precision on when the balance sheet rundown might commence, or if a September hike is on the cards, will be unlikely.

Then again precision and Federal Reserve-speak are not often mentioned in the same breath, so markets will probably take what they want from it anyway.

Otherwise it is a pretty quiet week.

The Bank of Canada is expected to raise official rates a notch (Wednesday), while China releases inflation (Monday) and trade (Thursday) figures.

The key piece of data in Australia will be home loans (Tuesday), while key readings of business and consumer confidence (Tuesday and Wednesday respectively) should tell two contrasting tales.

Business is pretty optimistic, consumers less so.


Date Event Forecast





Business conditions Jun: NAB survey, conditions and confidence fairly strong
Home loans May: A further slowdown in investor lending tipped



Consumer confidence Jul: Westpac series, pessimism outpacing optimism
ERA Q2 data Q2 production from uranium miner, prices are very low



Consumer inflation expectation Jul:
Whitehaven coal Q2 data Q2 production results from the big coal miner


Date Event Forecast



CH: Inflation Jun: Consumer inflation low around 1.6pc, producer inflation slipping around 5.5pc
EU: Eurogroup conference ECB big guns at a conference in Brussels on bank insolvency rules.



US: Small business confidence Jun: In positive territory



US: Yellen testimony Fed chair Janet Yellen testimony to Congress
CA: Bank of Canada rates decision A 25bp rise expected after recent hawkish commentary from the Governor



CH: Trade Jun: Solid surplus expected with imports and exports growing at the same pace as May
US: Yellen testimony Fed chair Janet Yellen before the Senate banking panel
US: Budget update Deficit should have narrowed from around $US90bn to $US20bn over the month
Friday14/7/17 US: Inflation Jun: Still pretty weak it fell in May, around 1.7pc YoY this time
US: Industrial production Jun: Fell in May, should bounce back











First posted

July 09, 2017 11:45:58

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