The past four
weeks have been very volatile, and risk averse traders have been
searching for somewhere to put their capital.
Although the bond markets have been reasonably
stable compared to recent volatiliy, traders
have not sought safety in them as they usually would. Traders have
instead been seeking safe-haven alternatives,
either because bond yields are
historically low, or because they don’t believe that governments have
the capacity to solve their debt issues
in the short-term. As a result, the
assets to which traders are turning as safe havens are
very crowded and appear to be close to fully valued, relative to their fundamentals. The Swiss Franc has hit
all-time highs against the euro and the US dollar, {and, having recently reached
USD1,911 an ounce, gold is approaching it’s all-time inflation-adjusted
high of USD2,400 an ounce, last hit in 1980.
Where is the global market going?
The market downturn was initially
triggered by US growth revisions, which revealed that the 5.1% downturn in the
GFC was larger than initially
estimated. Recovery was also found to be weaker, with both US and European output at September 2007 levels.
Following this, weaker-than-expected global data was
also released, with some traders
worried that the global economy was
heading into a double-dip recession, and that the global
financial system might require large-scale US and
European government intervention. These concerns were sparked by Italy and Spain’s government debt and expectations
that the European Central Bank (ECB) and International Monetary Fund
would need to bail them out. However, the current European
Financial Stability Facility package could not support
either economy, revealing that although these economies
are ‘too big to fail’ they are also ‘too big to bail’.
When the ECB began to
purchase Spanish and Italian debt and forcing
yields down to reduce government borrowing pressures, market
concerns focussed on France and the US. Following
the downgrade of US debt from AAA to AA+, such
downgrades are likely to become a regular feature in the financial
markets as both the UK and France’s net
government debt-to-GDP ratio is forecast to reach 80% in 2015, the same level as that
of the US.
Now traders are being
forced to reconsider their market exposure in an environment where,
not only are stock prices lower,
but there is a high risk that the growth of advanced
economies will be significantly below trend due to the
unwinding of a 25-year leverage and
asset price boom. The rise in leverage
enabled more participants to enter the market, and
the resulting greater demand for existing assets pushed
their prices up. However, consumers
are now cutting their spending and increasing their savings, which will continue to unwind the boom.
Previous deleveraging cycles have been,
on average, half the length of the build-up, and economic growth in former deleveraging
cycles has averaged 1.5% due to slowed government, business and consumer spending. If previous patterns repeat,
the 16-year build-up could take almost nine years to
unwind. In this period the economic growth of advanced countries
may rest at current levels.
Thus, combined Japanese,
European and US growth might remain low, and
this will make reducing government debt less likely.
What does this mean for Australia?
Economies with a strong focus on commodities, such as
Canada, New Zealand and Australia
have been protected from the worst of the downturn because
of to China’s growing commodity demand. China’s
demand is expected to rise,
meaning that the Reserve Bank of Australia probably won’t
cut interest rates just yet and, with climbing inflation, unemployment may have to hit 6per cent for last
year’s rate rises to be
unwound.
That being said, domestic
productivity is currently at a 25-year low, reflecting the lack of productivity-focussed
reforms in six years. The
lack of productivity improvements is creating an
environment where high-risk investors are not rewarded for their
risks, and instead
are rewarded for backing industries with a
proven resilience to global trends, which will
continue to deliver dividend and earnings growth
in difficult times. As a result, large, shareholder-focussed firms with healthy balance sheets are likely to
become the Australian safe havens for investors, while traders
might find profits resulting from large mergers and acquisitions
targets more attractive.
Remember that CFDs and fx are leveraged products and can lead to losses that exceed your 1st deposit. CFD trading may not be appropriate for everybody, so please ensure that you fully understand the risks concerned.