Stormy weather across all markets
Ebola, weak economic data in Europe and China, US
leading the fight against IS, Occupy Central in Hong Kong… So much happening and we all know negative
stories get more “likes” and “share” in general. The more important ingredients should be Euro
zone is still weak as expected and higher steroid dosage has limited
effect. US economy is strong or at least
stronger than other continents but quantitative easing is tapering off. Emerging markets are trouble, not the global
economy drivers. Stick to the simple
supply demand, bulls versus bears concept.
The bears have the perfect storm to attack and they managed. What was amazing was the fact that the storm
was not just in equities market but spread to other capital market instruments,
meaning currency and bonds.
Let’s look at scale of the wave. S&P 500 index closed at historical high
on 18 September at 2,019.36 and within a month, it has corrected 7.8% to close
at 1,862.76 on 16 October. It has
rebounded to 1,925 level on 21 October.
In the past year, there were two significant corrections in the S&P
500 index bull run. A 3.9% correction in
July / August and a 5.6% correction in January / February. So a 7.8% correction is a big deal. Is this a good time to get in? Let’s look at some areas where got hit even
more severely by the storm.
Eurostoxx 50 Index fell 12.1% in the same period
from 3271.37 to 2874.65. The index
rebounded to 2980 level on 21 October but the damage was made. The close on 16 October, 2874.65, was 1 year
low hence created a dip based on the past 12 months performance. The UK’s FTSE 100 Index also dropped 9.1% in
the same period from 6819.29 to 6195.91.
If trend is your friend, Eurostoxx 50 and FTSE100 Indices are friends of
the bear camp.
GBP’s weakness continued and the rebound after the
Scottish roller coaster was wiped out and even USD 1.6 to GBP 1 was broken a
few times in October. All the gain in
GBP against USD in the past 12 months has gone.
The winners are those who went to US for summer holiday. EUR against USD
is down 7% in the past 12 months. EUR
has been weak since July like GBP but EUR never enjoyed a rally against USD in
the first half of 2014.
The US Treasury market has also gone yoyo as money
ran away from risky asset like equities or high yield bonds to safe asset like
government bonds. iShares 10-20 year
Treasury Bond ETF listed in US tracks the investment results of a basket of US
Treasury Bonds with 10 to 20 years remaining life. The ETF price had a big spike in October as
its price rallied from USD 130 in the beginning of October to USD 137.7 on 15 October
and came back to USD 133.6 level on 21 October.
Compared to a steady uptrend since January 2014 from USD 125 to USD 130
at the end of September, the spike in October is like the Shard in the City. While US Treasury is getting money in, High
Yield Corporate Bond funds see money running away. iShares Euro High Yield Corporate Bond ETF
had a bungee jump in October. Its price
dropped from EUR 108.5 level EUR 105.13 on 16 October then rebounded back to
EUR 107.5 level on 21 October.
Considering the ETF has been crawling up and down between EUR 108 and
EUR 111 in 2014，paying
average 5.3% dividend a year. The dip in October looks like Moses crossing the
Red Sea on the price chart.
Gold put on a dead cat bounce in October after
breaking the psychological support of USD 1200 per ounce on 6 October. The last time Gold prices went below USD 1200
was in 31 December, 2013. Coupled with
the fear in equity markets, gold got some love and bounced back to USD 1250
level on 21 October. Gold rallied from
USD 1200 level in January 2014 to almost touching USD 1400 level in March. Then Gold prices have been treading downward
since. Why Gold prices could be just
having a dead cat bounce? Look at Crude
Oil prices which has been falling and falling since end of June from USD 103.66
to below USD 80 at USD 79.1 on 16 October.
Oil was once called Liquid Gold. With
Emerging Markets losing growth momentum and US using more and more shale gas,
if oil is liquid gold then gold prices would find it hard to decouple from falling
oil prices. No fear of inflation and no
sight of gold replacing USD, mean less reason for gold prices to rally.
