Friday, 20 July 2018

So many messes...

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Anthony Peters points to multiple causes for this week’s market downturns.

It would be difficult to describe whatever it was that happened to risk markets yesterday as anything other than them being given a thoroughly good spanking. September is rarely a good month for equities and credit but the one which is now drawing to a close is most definitely not an exception.

As the third quarter ends, key European equity markets are all in the red for the period with the Dax losing over 3.25% over the trimester and the CAC and the FTSE off by around 1.5%. The S&P has just scraped into the black as has the Dow but that might well have changed colour by the end of today.

Whatever technicals might have been at play and whatever month-end index buying should be creeping out of the wood-work, both were swamped yesterday in one of the largest sell-offs in US markets this year. The Dow was toasted for 264.26 points (1.54%) and the S&P for 32.31 points (1.62%) for reasons upon which nobody seems to be entirely clear.

Multiple culprits

The causes which are being cited are manifold and all are not wrong. There is the unrelentingly strong dollar which will be hurting US competitiveness and hence its growth prospects. There is the dollar’s impact on foreign earnings. There is the warning by Janet Yellen that rate moves might be afoot earlier than the market has priced. There was a storyline which thought that the Russian parliament’s moves to allow countermeasures to the West’s economic sanctions spelt a renewed raising of the temperature in the Ukraine affair, and of course there are the bombing actions against the Islamic State. Finally, the trouble at Apple’s door with the bendy iPhone 6 and the botched upgrade of iOS 8 blowing a shell-hole in the formerly bullet-proof reputation of the world’s favourite tech company.

I’m not sure which of the arguments I would favour to appoint as prime suspect, but it felt as though a lot of people are suffering from twitchy trigger fingers. Here in the England, Mark “The Magician” Carney was also on the wires as he tries to remind people not to mistake the prevailing pricing levels of risk assets as being anything other than the result of a near-blind hunt for yield.

If we sell off again today, irrespective of by how much, I can already see the week-end’s newspapers musing as to whether the Crash of ’87 is just about to be repeated. I was there and I can tell you that it all feels very, very different. It also doesn’t feel at all like 2000 when we were building up to the blow-out of the bubble.

Until I find myself being quizzed by taxi drivers what my hottest stock tip is, I don’t see us as being in a stock-price bubble. A correction may be upon us – even a healthy correction – but I don’t see anything like a repeat of 1987. That does not make yesterday look any less ugly.

Credit markets also got run over, with the iTraxx Xover index taking it on the nose. In three days it has widened from 228 points to 257 points but that is still chicken-feed compared to the wobble it suffered in early August when it briefly broke north of 300 points.

Personally, I can’t see a load of follow through selling today and suspect investors will sit back and lick their wounds before making the next move. In recent years, sharp sell-offs have always proven to be prime buying opportunities. Cash remains cheap and the cost of not being fully invested is hard to bear in a world where performance is constantly being measured.

Unless something dramatic happens over the coming week-end, things should improve next week with the new month and the new quarter.

On Chinese fraud and commodities

However, lurking in the background is possibly a much bigger and a much more worrying story. The Chinese have unearthed US$10bn of fraudulent trade financing deals. Although of minor relevance to the forex market where the news first broke, the impact on commodity pricing could be much larger were it to emerge that the fraud is wider and deeper than has so far been revealed. These fraudulent trades have all found their way into the statistics for Chinese demand in commodities which in turn has held significant sway over global price formation.

Should we suddenly discover that demand has been materially overstated, then we must assume that the global pricing structure is incorrect. Pop go commodity prices, pop go commodity stocks, pop go commodity currencies, pop go freight prices… I could go on. If there is straw which might be capable of breaking the camel’s back, this could prove to be the one.

In this context US$10bn is not huge. To immediately extrapolate from the relatively small fraud, of which we so far have knowledge, to arrive at the whole of Chinese commodities demand to be a load of smoke and mirrors would be fatuous. China Import Iron Ore prices which had just fallen below US$80.00 the day before, yesterday fell further to close at US$78.60. This time last year that was US$134.00. Sometimes little stories like this one can go on to blow up a market and I would advise to keep an eye on it. It will not be headline news but could insidiously undermine the hope that China is set to pump growth hormones into the eurozone.


Alas, it is that time of the week again and all that remains is for me to wish you and yours a happy and peaceful week-end. In fact, it not only that time of the week, it is that time in the biannual cycle which sees America’s and Europe’s finest do battle for the Ryder Cup.

The Yanks have had a torrid time. Since 1985 they have only won 4 times against Europe’s 9 victories with one draw in ’89 which had Europe retain the trophy. The Americans haven’t won on European soil since 1993. They will no doubt take a leaf out of Mario Draghi’s book and do whatever it takes. May the weather hold in Scotland (or is that the UK?) and may better team win.

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