Global markets whipsaw as investors suffer ‘acrophobia’

In another wild week for markets, global indices darted around on the back of contradictory news.

In another wild week for markets, indices around the world whipsawed on the back of contradictory news.

Global markets appeared to start the week bullishly, welcoming the news that US President Donald Trump and his Chinese counterpart Xi had agreed to a ceasefire in the trade war during a meeting at the G20 in Buenos Aires. Asian and European markets – both heavy swayed by global economic outlook – saw strong gains. US markets posted modest gains.

The good cheer, however, was short lived. By Tuesday (December 4), enthusiasm for the Buenos Aires agreement started to wane. This was exacerbated by Trump deciding to proclaim in a tweet that he is “a tariff man”.

At the same time, markets also seemed to grow more wary of the strength of the US economy with the so-called yield curve, the difference in yield between short-term and long-term bonds, starting to approach an ‘inversion’; when this occurs the yields of short-term bonds are higher than long-term bonds. Historically, this has been a red flag that an economic recession is approaching, as longer dated paper should offer higher yields to compensate investors for lending their money for longer.  

The result: the Dow Jones plunged nearly 800 points, or 3.1%, its worst day for months on December 4. The S&P 500 also shed over 3% of its price.

The drama, however, was not over. On Thursday (December 6), news emerged that Canadian authorities, at the request of the US, had arrested the chief financial officer of Chinese phone maker Huawei, who also happens to be the daughter of the company’s founder.

The arrest raised fears that the supposed trade war truce will be short-lived, which again weighed on global markets. One of the biggest casualties was the FTSE 100, which closed 3.15% down, its worst day since the Brexit vote in 2016. However, by the time of writing, stocks in Europe, the UK and Asia had started to recover.

What’s behind such see-sawing markets?

Markets appear spooked by tensions between the US and China, with any escalation it is feared, likely to hurt economic growth. At the same time, there is a growing belief that the US may soon(ish) find itself in economic recession.

However, we should remember that, for now at least, global economic conditions are still relatively strong, argues George Lagarias, chief economist at Mazars. Lagarias points out that global earnings are expected to grow by 13.6% in 2019.

In particular, while US-based companies are still reaping the benefits of Trump’s tax cuts, he also points out that inflation is still benign. Meanwhile in Europe, he says, a weaker Euro should soon start boosting European exporters.

He argues that while global growth seems to have peaked, its current rate of 3.6% is still above the average seen since 1980, with no projected slowdown expected to occur before 2020.

“So, with good earnings, good growth, happy-ish consumers, loose credit conditions and full employment, without inflation nonetheless, why are markets so worried?,” asks Lagarias.

He answers: “We believe that markets are getting a case of acrophobia (fear of heights). After almost 10 years of this economic and financial cycle, which conventional wisdom says should not last more than five, some investors believe this is about where things should be ending.

 “Yet, while we do see areas where pressures are building up we cannot identify any single pressure point which we could pinpoint as the culprit for the current volatility.  If we had to pick, we’d say that the prospect of 3-4 more rate hikes next year and uncertainty over the US Federal Reserve’s intentions is what is exacerbating risks of every kind and unnerving investors.”

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