Financial markets have been surprisingly quiet before the last quarter of the year that could be filled with economic events, financial and political drama, according to Wall Street Journal (WSJ).
Investment fund managers said that recent silence hides uncertainty, and they are preparing their portfolios for a possible rise on the markets, but also to withstand shocks ranging from Europe issues to new monetary relaxation measures from central banks and changes at the leadership of the two largest economies, the U.S. and China. “We certainly not ignore the possibility of negative market developments,” said Tahnoon Pasha, CEO, Equities and Fixed Income Operations at Aviva Investors Asia Pacific.
The speech on Friday by the U.S. Federal Reserve (Fed) chairman Ben Bernanke, was, in a sense, the start of the new season, writes the WSJ. Bernanke defended Fed’s monetary policies and fueled expectations for a new economic stimulus, supporting U.S. companies, gold price, oil and the price of ten-year U.S. Treasury bonds.
Bernanke’s comments are just the tip of the iceberg in terms of the impact the central banks likely will have on markets. In Europe, investors expect the President of European Central Bank (ECB) to live up to promises to do “whatever it takes” to save the euro. Some investors interpreted China’s announcement Saturday regarding last month’s contraction in manufacturing activity as a sign that China will add extra incentives, considered so far too mild.
This week marks the beginning of the fall in the U.S. and Europe, a time when investors return from summer break and resume transactions with an eye toward their year-end financial results. Trading volumes should increase, as well as volatility.
Investors want to know if current growth is sustainable. It gains more ground the opinion that, if political leaders and central banks are not up to market expectations, there could another round of massive sale of assets.
Short-term news is expected especially in Europe, with a meeting of the ECB on Thursday that could bring more clarity on bond purchase program, followed next week by a decision of the German Constitutional Court on the legality of European Stability Mechanism. After several years of waiting vis-a-vis the situation in Europe, investors are not convinced that a permanent solution is near.
“Not that I would expect strong political decisions, but I hope to see more transparency about what will follow,” said Tim Schroeders, fund manager at Pengana Capital in Melbourne, which manages assets of $1 billion. Schroeders said that he retains exposure to certain risky assets, but at the same time he stays with investments that are easily traded and avoids shares with low liquidity, as volatility is expected to remain high until the end of the year.
“After September we will probably have further confirmation that Europe may defer any major restructuring, with a positive effect on short-term financial markets,” said James White, an analyst at First State Investments, a company which manages assets of $148.8 billion.
Investors are also carefully following the Chines political change at the top in October and the U.S. presidential election in early November, both events having the potential to lead to new economic incentives.
Fundamentals of current market growth trend are different from those of positive period at the beginning of the year, when the MSCI index for Asia excluding Japan rose by 22% between November and February, according to HSBC analysts.
Previous period of growth was driven largely by the ECB announcement on longer-term refinancing operations, through which European banks were able to borrow money at low interest rates. In the current period of recovery, the markets mainly reacted to the expectations that something will happen and the growth takes place in a difficult climate, during the deterioration of profit estimates and a decline in trading volumes.
Problems have begun to emerge, according to WSJ, with the MSCI Asia excluding Japan index declining by 2.8% compared to August 23, while there is lower optimism regarding central banks’ actions, in the absence of new information in this regard.
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