The volatility of global investment markets in recent months can be explained by six factors, says Instreet’s George Lucas – and they all begin with the letter ‘C’.
If you’re wondering what has caused global markets to be volatile in the recent months, you need to take a look at six market factors – all conveniently beginning with the letter C – China, consumer demand, commodities, currencies, central banks and company earnings.
Let’s take a look at each one in turn.
China: hard landing fears diminishing
Recent data out of China indicates that growth is stabilising and fears of a hard landing were overstated.
And with recent flash PMI numbers for advanced economies showing activity picked up in October, claims that the global economy is in the throes of a broad-based downturn have also been clearly overstated.
The Chinese stock market has stabilised in response. The changes haven’t made their way through to the real economy yet, but the market is expecting fiscal and monetary stimulus measures to kick in during the last quarter of this year.
Consumer demand: on the up
Consumer demand in China has been stronger than expected with retails sales numbers in the latest GDP data beating expectations.
The recent fall in China’s stock market has not had any real effect on Chinese consumers.
In the US, even though GDP growth for this quarter is expected to slow from 3.9 per cent to 1.5 per cent quarter-on-quarter, it’s still a good result.
There seems to be a classic liquidity trap in the US with consumers coming back but not as strong as the market expected.
Meanwhile, the housing market has improved significantly better than expected.
Here at home, strong consumer demand has prompted domestic banks to raise interest rates outside RBA moves.
Whilst it impacts home loan rates, the main goal is to make term deposits more attractive as the banks compete for funding sources that attract better capital treatment.
The falling commodity market seems to have stabilised, supported by the expectation of better demand from China and beyond.
The strength of the USD is not causing too many problems at the moment, but it remains a risk and could continue to put downward pressure on prices.
Currencies: boosting competitiveness
The US dollar has rallied recently following announcements by the People’s Bank of China (PBoC) and the European Central Bank (ECB) that further easing is being introduced.
There is also the expectation that the Bank of Japan will follow suit.
The stronger US dollar is improving the competitiveness of many export-orientated markets, including Japan and Europe.
Central banks: loosening monetary policy
The PBoC has delivered another cut to benchmark interest rates and the required reserve ratio.
This loosening shouldn’t be taken as a sign that policymakers are more concerned about the economy.
Rather, this is a controlled easing cycle that begun months ago and policymakers still have more room to move.
In Europe, the ECB left monetary policy unchanged on Thursday as President Draghi gave strong signals the QE program will be expanded in December.
He claimed the decision to offer additional monetary stimulus had not yet been made and that it would depend on data released between now and the next meeting.
This is the strongest hint the ECB could have made that action is imminent.
The ECB also apparently discussed a further reduction in the deposit rate, which is already at -0.2 per cent, despite previous hints that it had reached a floor.
Meanwhile in America, the Federal Reserve is expected to keep rates on hold at this week's meeting. The market now doesn't expect a rate hike until 2016.
Company earnings: better than expected
Earnings in the US have been better than expected with 70 per cent of companies beating expectations (so far).
Major tech companies such as Amazon, Alphabet (Google) and Microsoft are leading the charge. That said, there are still another 350 companies to report.
George Lucas is the managing director of Instreet Investment.
As artificial intelligence (AI) becomes the “future of everything”, savvy investors are heavily backing companies involved in this space...