Market Volatility – Our thoughts on current market movements
Last week we sent out an e-mail that celebrated the first reduction in UK interest rates for 4 years. The last paragraph ended ‘today offers some relief that better times are on the way’. Timing, as they say, is everything.
In the two trading days following our e-mail, global stock markets witnessed significant falls on the back of a weaker than expected US nonfarm payroll number (fewer hires, more people off work and more layoffs) than anticipated. This data undermined the perception that the Federal Reserve would be able to avoid a recession and opened up the possibility that policymakers are now behind the curve with their interest rate reduction strategy.
The impact of this news was exacerbated by the Bank of Japan raising its interest rate and halving its Bond purchase programme. This news increased the value of the Yen. Many investors have been borrowing in Yen to fund purchases of international equites. This is known as a Yen carry trade. As the cost of servicing the trade increased, this has combined to drive the Japanese Nikkei 225 Stock Index down by 13% on Monday. On the positive side, overnight we saw the Nikkei 225 rise by 10.23%, its biggest intraday rally in history, wiping out much of the loss experienced during Monday’s volatile trading session. Other developed markets have followed suit on Tuesday and gains have been broad across all markets. A short-term correction can be healthy and helps to clear out some of the froth that develops when a bull market is on a run. This type of correction offers buying opportunities for those, brave enough to make the commitment to buy into volatility.
The most probable outcome of this volatility will be that the Fed will reduce interest rates by 0.50% in September rather than the expected 0.25%. There is also a strong possibility that more reductions than previously anticipated will be actioned between now and the end of 2024, with an overall reduction of 1.20% in US interest rates looking possible.
This backdrop would be very supportive for risk assets and for Bonds. We expect markets to stabilise and recover, as the fundamentals for the global economy look positive. Once markets digest this continued progress will come back to the fore.
In summary the advice would be as follows:
Stay invested and stay diversified in the asset classes you are holding.
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