Monthly Market Report - November 2014
29th October 2014
With commentary from David Stevenson
Surprise, surprise! The great bull run of the last few months has shuddered to a grinding halt. As we're about to discover, virtually every measure of risk has exploded in value, equities have plummeted and risk is off the table. The cause? Equity bears point to the bond markets, which are signalling a very real concern about deflation, powered in part by a global slowdown in growth (helped along by Eurozone troubles). Yet the cynic could suggest that the we were in fact long due another bout of taper tantrums by the market. "We want more not less QE and we want it now!" might be refrain of the spoilt equity investors!
More than a few analysts have been warning that as the Federal Reserve tapering comes to an end, volatility would shoot up again. Investors are clearly signalling that NOW is the WRONG time to be turning off the financial life support and that may economies are still in need of monetary intervention.
The 'get out of jail cards' available to central bankers and governments are obvious - and in plain sight. Close inspection of recent FOMC minutes reveals that the Federal Reserve is in no hurry to tighten, with the first rate hike not likely until 2015. In fact, the recent volatility might even have pushed that hike out to 2016! It's also increasingly likely that Germany will be motivated to do 'something' to limit the damage caused by a third recession in just a few years within the Eurozone. I'd wager that the ECB might be pushed into QE in early 2015 to stop nationalist and far right parties from sweeping the board in a spate of national and local elections.
For structured products investors the key question hasn't changed - this nasty October bump was expected and we must decide whether it is a growth scare where equity investors endure a breather, take profits and then dive back in following the right signals from the central banks OR are we at the start of another global recession? If it's the latter, all bets are off and investors should run for the hills, and chase those UK and US 10 year gilt yields below 1% (Germany's are already at that level). If we're facing the former (my hunch), now might be the right time to do some fishing for interesting markets and products, helped along by the fact that rising bank CDS rates and increased volatility levels will help issuers make their structured products much more attractive.
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