Global volatility
Market’s future comes down to three factors. Pelletier, FP8
Volatility has returned to global equity markets over the past few weeks, because of worries about the rapid decent in oil prices and the softening economic data coming out of Europe and emerging markets.
As a result, large daily swings in the markets are not uncommon, making it a rather challenging environment for investors.
We are at an interesting inflection point, as the majority of equity markets have just recently crossed their 200 day-moving average, an indicator that often hints at more downside risks than upside potential ahead.
At times like these it’s important to take a step back and separate out the fundamental developments against all the noise. In this regard, there are three important factors that could influence the direction of the market. Lower commodity prices
Oil prices at times can be a great indicator of the overall health of the global economy, especially rapidly growing ones such as emerging markets.
But any hint that this growth is abating or, worse, that deflationary is pressure setting in, is not good news for resource-based economies such as Canada.
Investors have responded in kind to the recent rout in commodities by hitting the sell button first and asking questions later.
This has not been the case in the U.S., where many are solely focusing on the gains for consumers from weaker energy prices while ignoring the potential loss in economic stimulus from a capital-intensive shale oil sector now under pressure from lower oil prices.
We are also concerned about further geopolitical instability, especially in oil-dependent economies like Rus- sia, Venezuela and the Middle East should weaker pricing persist.
This is no doubt putting tremendous political pressure on the leaders of those countries and who knows how they might react, resulting in potential dangerous implications for both commodity and equity markets. U.S. economic growth
U.S. corporations have been firing on all cylinders, as is evident by their profitability levels reaching an all-time high when compared against GDP. U.S. unemployment has also returned to pre-financial crisis levels, with the latest jobless claims falling to a 14-year low.
But China and Europe, both large trading partners of the U.S., are experiencing slowing growth.
The International Monetary Fund cut its 2015 global growth forecast to 3.8% in its latest report, citing both eurozone recession risks and emerging-market slowdowns, down from its January forecast of 5.8%. It’s the third time it has reduced its forecast this year.
Can the U.S. go it alone with the rest of the world experiencing deflationary pressures? U.S. Federal Reserve
The final and most important factor that will have the greatest impact on forward market performance is how the equity markets will react in the absence of the U.S. Federal Reserve’s quantitativeeasing program, which ends this month.
Fortunately, interest rates remain at ultra-low levels, allowing U.S. corporations to continue taking advantage of extremely low-cost debt to buy back stocks.
Don’t kid yourself, the magnitude of these share buybacks is enormous, totalling well over US$2-trillion since the 2009 lows and have represented more than 95% of corporate earnings.
But a rate hike could put future gains at risk and the Fed knows it, so interest rates will likely remain low a lot longer than many expect. If so, will low rates be enough in the absence of QE to drive the markets back to new highs?