Weekly Investment: Trying to make sense of it all
We hear again how global economic conditions might cause the Fed to have to soften or delay its tightening bias.
Investors can be forgiven for thinking that at the moment it is a rather crazy world in which we live and invest – and that this, too, is in a broad sense another leg of the ‘New Normal’.
Indeed, many younger investors have never witnessed such volatility, or apparent illogicality. For instance, why, when so many are worried about Japan’s problems, should the yen have strengthen so much after the previous week’s announcement of the Bank of Japan moving to the use of negative interest rates? We comment on this below, but the question seems a classic example of the markets serving-up a surprising result, in this instance after the latest of the major central banks’ policy actions.
Elsewhere in the markets, equities rallied well off their lows in most instances by the end of what was another fairly turbulent week. The S&P500 closed ‘only’ about 1.3% lower, with eurozone equities down about 4%, and Japanese equities more than 10% lower . Banks and other financial stocks were especially hard hit during the sell-off earlier in the week, reflecting investors’ concerns that further moves towards negative rates (with their complications for all concerned) would likely be forthcoming, that increasing regulations are harming the whole sector, and concerns regarding the quality of earnings from investment banking operations.
Investors suffered a turbulent week, although most equity markets closed well off their lows.Claude-Henri Chavanon
However, by the week’s end, many bank stocks (Commerzbank was a stand-out, up 18% on Friday) had bounced strongly, as had energy and mining stocks (led by very strong oil and gold prices).
In her testimony to Congress last week, Fed Chair Yellen had the appearance of someone whose institution has received widespread criticism in recent weeks. In some respects the record is stuck, for instance when we once again hear how global economic conditions might cause the Fed to have to soften or delay its tightening bias. Just a few days earlier a story broke (whether or not garbled or untrue, we don’t know) to the effect that the Fed had suggested to some banks that they include the possibility of negative rates in their stress-testing, and this story ‘trended’ for a while. So the Fed is up against it, and looking confused and out-of-touch.
While they acknowledge that the U.S. economy isn’t doing brilliantly, they are still trying to get anyone who will listen to believe that a 2.5% average earnings increase is quite impressive. This leads into a brief discussion of the foreign exchange markets, prefaced by the probability that last week the Fed lost even more credibility in the markets – and in truth this fueled weakness in the dollar.