A week in the life of a volatile market

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You may remember from our previous article that global equity markets have faltered as policy makers crank up interest rates (If you aren’t clear on this, please, follow the link to the article, we explain it all super clearly). Since then, things haven’t got any smoother as markets have been swinging wildly. Global stocks were battered last week but then recovered on Monday with some markets showing their biggest one-day gains in years, only to change direction once again on Wednesday with equally large movements back into the negative. You may be left scratching your head and struggling to keep up, so in this article we’ll explain the drivers in our signature simple style to help you sound clever at the dinner table.

Wednesday 21/03/2018

Inflation and interest rates are still a key factor. Last week saw updates from several central banks, these organisations set their country’s base interest rate which then trickles down to all borrowing. The US Federal Reserve (The Fed) made a statement, followed by the Bank of England. Regarding the short term, neither produced any shocks as the rate rises for 2018 met market expectations. The Fed raised its base interest rate from 1.5% to 1.75% and signalled that there would likely be two more rates in 2018. The Bank of England’s kept the rate the same but suggested another 0.25% rise would come in May.

The response of the global stock market was initially confused before settling in the negative, The Fed’s longer-term position was to blame. On the back of an encouraging outlook on the US economy, The Fed forecasted three interest rate increases in 2019, one more than originally planned. We are still at the beginning of 2018 and this forecast is in no way a commitment, The Fed can and will adjust their plans as the economy changes. However, investors saw this as a statement of intent, one of increasing interest rates. As discussed in a previous article, this would upset global stocks, the end of cheap borrowing and low saving incentive would stop business replicating the impressive returns of recent years.

Thursday 22/03/2018

This was not the only dampener on stocks last week, Trump announced some brazen foreign policy which hits back at China for supposedly stealing US intellectual property as well as tackling the trade deficit between the two nations. This deficit refers to the value of which Chinese exports into the US exceed that of goods coming the other way. Typically, the economy doing the lion’s share of the exporting benefits more because it is producing and selling more goods which creates jobs and profit from each sale. Trump’s proposed answer to this is to slap an annual $60 billion worth of tariffs on Chinese imports, these are additional charges that would have to be paid to the US government by Chinese businesses when exporting into the US, making it more expensive to do so. This would discourage exporting into the US or at least allow it to profit more from the currently unbalanced relationship. A swift and obvious response from China confirming they would reciprocate these measures cemented concerns that this was the beginning of a trade war between the two biggest economies in the world. This would be a blow to free & unrestricted international trade, a system that economist widely believe is the most prosperous for all involved, this explains the global impact on stocks. Restricted trade hinders a country’s ability to focus on and grow areas of strength, it must expend effort producing all the goods it requires since they can’t be imported. For example, Trumps tariffs on steel imports will actually have the unintended effect of making American people poorer. Using steel to make things such as cars is an American industry of particular strength and one providing many jobs, much more so than the production of steel. This industry will be hurt, putting jobs at risk, when the tariffs increase the price and restrict the supply of foreign steel and the domestic industry isn’t able to pick up the slack.

26/03/2018

However, thankfully one thing you can be sure of with Trump is that you can’t be sure of anything with Trump. After a calming weekend of measuring his hands, Donald seems to have softened his stance at the start of this week. Comments came from Teasury secretary Steven Mnuchin that “very productive conversations” between the two countries have made him “cautiously hopeful” that an agreement can be reached. So, the threat of a trade war has retreated somewhat and global stocks, led by the US, surged. However, Mr. Mnuchin also said that the US wasn’t bluffing or “afraid of a trade war”, a reminder that negotiations could easily go sour and markets would soon crash back down. Yet, some analysts believe the potential impact of the trade war on global stocks has already been overestimated in an overdone sell off.

Wednesday morning 28/03/2018

In another “WTF” moment, Monday’s resurrection was undone as the Wednesday morning episode of this soap opera featured massive global loses. Tech stocks fell spectacularly, big names like Facebook, Twitter and Alphabet (Google) were crushed as investors feared repercussions over the handling of user data. You may have heard about the recent scandal involving Facebook selling 50m of its user’s data, including contact details as well as interests and likes to a company called Cambridge Analytica. This company used the data to design targeted adverts for Trumps election campaign (all roads lead to Trump), all without consent. US congress have since launched an investigation to determine whether where Facebook “failed to protect user’s privacy”. A damming verdict may result in eye watering fines or make advertisers unwilling to use these sites, but most worryingly for investors is the potential for congress to tighten up data privacy regulation. Wednesday’s news that Facebook CEO Mark Zuckerberg will testify to congress was seen as a sign that Mark may be forced to bow down to these changes, sparking a tech rout. More stringent rules may restrict the ways tech companies can utilise data to generate revenue as well as making their business operations more cumbersome and expensive. As usual, the effect from the US markets trickled down into the rest of the world. Regulation change in the US would set a precedent across the globe, especially as companies that handle user data are likely to have an international user base.

And that’s where we are right now, in this new era of volatility who knows what is going to happen by the end of the week. We will try to keep you posted on StickPickers.co.uk and as always, in our simple and explanatory manner. 

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