By Mike Dolan
LONDON, Sept 21 (Reuters) – A week of erratic market trading
and odd commodity price signals may well just be a reality check
after weeks of policy-inspired euphoria but they also reveal
something about the confused and hesitant state of the
investment world right now.
In the past five days, crude oil prices have p lunged
almost 10 percent, while gold has climbed to its highest
since February and world equities flatlined. The
euro has retreated, but Spanish bond yields fell again
and global shipping prices surged.
It’s probably not very sensible to build a single narrative
around such short-term moves but you’d be hard pressed to find
one if you tried.
As another tumultuous financial quarter ends next week, it’s
tempting to blame anomalous price swings on the squaring of
trading accounts and investment positions after a breakneck
period that saw a market hiatus followed by an overwhelming, if
not concerted, central bank response.
As we near the end of another tumultuous financial quarter
in which a market hiatus was followed by a galvanising, if not
concerted, central bank response, it’s tempting to blame
anomalous price swings on the squaring of trading accounts and
investment positions.
But what is clear is that tracking policy changes, rather
than any fundamental economic and corporate analysis, was once
the only way to make money over the past three months. That
presents a growing headache for asset managers, who expect to
have to operate in this environment for years to come.
As the flipside to the spectacular failure of free financial
markets in the years before the 2007 credit bust, a reluctant
new world order of almost constant monetary and fiscal
intervention and growing government regulation of finance is
being established to manage years of paying down debts.
The often slow and unpredictable political processes driving
such economic decision-making are impossible to slot into neat
financial models, leaving investment managers way out of their
comfort zone.
“Time horizons have absolutely collapsed for asset managers
and this herds you into either short-term tactical trading or
really long-term investing,” said Andrew Milligan, Head of
Global Strategy at Standard Life Investments’ multi-asset team.
“You either rush into a trading position when you see a
window opening or you hold a three-to-five year conviction about
direction. But the six-to-12 months’ horizon is almost
impossible to second-guess.”
The assertion of political influence over economic and
market direction may be understandable after the excess of
pre-crisis days and the public demand for redress.
But it complicates investment decision-making, saps volumes
and transactions across all markets, and can lead to erratic
price moves as policy changes drive big trading waves.
FOLLOW THE POLICY
And it’s not always one global policy push or political
process you need to follow.
A drop in oil and commodities this week may not have been
terribly intuitive after a wave of central bank money printing
that many see as stoking long-term inflation. A monthly poll of
fund managers surveyed by Bank of America Merrill Lynch
published on Wednesday also showed investors going overweight
commodities for the first time in five months.
Saudi Arabia’s statements on boosting supply to cap crude
prices would have been a better guide.
The Federal Reserve’s newest bout of bond buying and money
printing goes a long way to underlining Wall St’s latest
surge but doubts about Chinese policy action amid its
once-in-a-decade leadership handover next month has seen Chinese
stocks go in the opposite direction.
Which one tells us more about the global economy or
underying demand for goods, services and commodities? China, say
many. But is that just pricing policy delay or a hard landing?
On the other hand, November’s U.S. presidential and
congressional elections could have profound implications for the
looming U.S. fiscal policy conundrum and thorny issues such as
political oversight of an increasingly activist Federal Reserve.
And that’s before we get back to the minefield of euro zone
politics and even Germany’s critical 2013 elections.
Regulatory timetables, such as the proposed U.S. Dodd-Frank
legislation on financial reforms or euro zone banking union, may
also product unpredictable market and investment outcomes.
As for the real global economic pulse, the picture is still
unclear. Most expect a slow-growth funk to persist, but signals
are all over the place.
Global manufacturing shows decent signs of recovery,
according to surveys out this week – but services are still
declining. Recessions in many euro zone countries are a huge
drag worldwide, yet U.S. housing – at the root of the whole
credit crisis – is making a significant recovery.
Perhaps the only way to keep things in context as the
quarter comes to a close is to remain mindful of price moves so
far this year.
Developed world equities are up 16 percent in 2012, with
German stocks’ 25 percent making them a big outperformer. Yet
ultra-low-risk U.S. Treasuries and German Bunds are also up 3-5
percent, while safe-haven gold prices is 13 percent higher.
Any notion of a defensive old-world play is countered,
however by a 13 percent climb in emerging market equities and 14
percent surge in emerging debt indices.
Avoid commodities? Soft commodities for sure: they have lost
more than 13 percent. But copper prices are up 10 percent since
the start of the year.
Something for everyone, perhaps.
