As we enter the receding days of summer, markets are getting a little messy and uneven. Much of it has been triggered by current events, which kicked off last week with a violent and troubling clash between Alt-Right protesters and opponents in Charlottesville, Virginia, triggered by a nationalist rally. The Presidential response provoked a firestorm of media and business criticism, resulting in, initially, the resignation of certain CIOs from the President’s council of business leaders and eventually in the disbanding of both councils advising on manufacturing and the US economy. The mass resignations were followed by the entire Arts Council resigning, the removal of firebrand strategist Steve Bannon and a trickle of rebukes by GOP politicians. It was not a lazy August week by any stretch of the imagination.
Markets reacted as if the uneasy honeymoon between President Trump and the business world had come to an abrupt end and there were rumors that things could even end in a “messy divorce”.
While geopolitical matters were quiet on the Korean peninsula there were anxieties raised by a well-orchestrated terrorist attack on a packed pedestrian street in Barcelona, while the President proposed an increase of troops on the ground in Afghanistan. Strong and consistent defense spending has been a constant theme of this administration – a commitment not felt as consistently by the financial and healthcare sectors.
To add to the sense of uncertainty, the Fed in its July minutes noted “vulnerabilities associated with asset valuation pressures had edged up from notable to elevated”. In response to these “elevated” warning signals markets have been decidedly skittish (sliding by over 1.5% on Thursday of last week), with volatility prone to spiking and the dollar continuing to display weakness.
While Jackson Hole was this weekend packed with eclipse watchers – next week it will be filled with Central Bank watchers. Will there be a total eclipse of conventional monetary policy? At this stage it is not expected that much disruption will ensue from those speeches, although it is likely that certain lofty asset valuations (see chart above) will attract some commentary. To date, asset purchases have succeeded in boosting asset prices (naturally, to be expected) more than affecting economic growth, although the latter may well have been their target.
Other evidence of existing cold feet has come with the reports that US equity funds have seen their 9th consecutive week of outflows, with over $4 bn leaving the area (according to EPFR Global), and a number of notable market commentators, such as Dan Ivascyn of PIMCO and Bill Ackman of Pershing Square, buying protection.
In this tense month, we watch and wait to see what September and the inevitable pulling of asset purchases will bring in terms of volatility and pricing pressure.