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.