The oranges are out. What’s in store for the second half of 2017?
What will go down in history as one of the least exciting six months for the global financial markets ended with Bloomberg headlines on the penultimate day informing of a return of volatility into global markets as they approach half-year end.
A look at what actually happened on Thursday shows that the Dax gave up 2%, the FTSE lost less than ½ %, the Nasdaq-100 had some jitters to slide 1.7%, whilst the non-tech benchmark US Indices shrugged these declines off. Come Friday, global indices had more or less stabilised.
For those of us who have traded the markets for more than a handful of years will recount that a day such as that indicated above used to be very much the norm around 2000 and during 2008/9. Such a daily move back then would have constituted a dull day.
So, we are half way through the calendar year and what do we have to show for it…
Well, equity markets around the world could be summed up to be in rude overall health, with the Nasdaq-100 (see chart above) notably receiving increasing attention along with the word ‘bubble’ oft-mentioned in the same sentence. It had just enjoyed its longest streak of monthly gains of this decade. The Euro is at 12-month highs (see chart below), Sterling is hanging around 12-month highs post the Brexit debacle, whilst oil is held within the $40s, a far cry from the $120s several years back and most commodities are depressed. Government bond yields remain low, even with the whiff of inflation rearing its head in the developed world and Gold seems rangebound between $1,200 & $1,300 per ounce.
One article I read last week stood out for me, particularly against a backdrop of the snapshot of global asset classes mentioned in the paragraph above.
The Institute of International Finance had totted up where global debt currently sits. As soon as you read the figure, you naturally question at what level global debt was when the last financial crisis unfolded just under a decade ago. And we are told that an unmanageable mountain of debt being accumulated within the global financial system caused that particular crisis.
The amount of straw that broke the camel’s back in 2008/9 was the small matter of $142 Trillion which was the amount of global debt in Q4 2007. A simply staggering amount and the equivalent of over $20,000 for every man, woman and child currently on this planet!
Now hazard a guess at where the IIF say that global debt now sits…
Yes, you guessed it, almost exactly 50% higher than in Q4 2007! Global debt is now at $217 Trillion! As I’ve mentioned before, ultra-low interest rates and leaving the taps of quantitative easing running have ensured that debt has surged, yet markets have far from capitulated, rather rallied to lifetime highs.
On the subject of capitulation, Janet Yellen, the current helmswoman of the world’s largest Central Bank (US’s Federal Reserve), has predicted that none of us around in 2008/9 will ever live through another financial crisis. With global debt now at over $30,000 per capita, I am not sure whether I share her view! A degree of inflation would help to reduce this, but history has shown that it’s much easier to control inflation on its way down than the other way around. Who knows how the world’s central banks will manage this? Will national interests overcome those voices that might be calling for a more unified global approach to tackling the debt pile?
It is certain that this debt overhang was not what made the markets jittery on Thursday last week. However, will it become a theme in the second half of 2017, as more central banks around the world follow the US’s lead in starting to tighten (raise) interest rates? I believe that such debt fear rhetoric will not be far away, especially as China seems hell-bent on adding trillions of dollars to the global mountain every year, like that irritating party guest who arrives last to create the largest impact in showing off what is the flashest present!
However, does this, along with what many pundits see as stretched valuations and possible lower profit growth, mean that we shall see global stockmarkets turn sour in the next six months?
One notable statistic to come out last week makes me disinclined to pronounce an outright bearish call for H2 2017.
And that fact is the banking analysts, those so-called experts of Wall Street, have collectively made their least bullish H2 call since the turn of the millennium.
When the herd are saying one thing, I am always happy to be on the other side of the fence
With the Nasdaq-100 still up 16% this year, exactly double the Dow Jones & S&P500, I don’t see this outperformance continuing in the coming months. Rather we can expect more volatility in the American household tech stocks, whilst the supposedly less volatile major US benchmarks could well keep ‘yawning’ slowly higher still. I wouldn’t bet against another year where the American bellweather indices finishes on their highs, whilst the Nasdaq may pause for breath or even succumb to some healthy profit taking.
The one currency I am sure will not enjoy as good a H2 as H1 is Sterling.
Having teased around the 1.20 mark in January, despite Brexit fears, the fragility of the British economy and concerns about Mrs May’s parlous state of political capital, the British Pound has risen to 1.30 versus the US Dollar. I expect a return to 1.20 to occur before we see £1 being worth $1.40. If you have the reverse view to my short Cable (GBPUSD), you would be able to oppose the trade on my Pelican account and open a long position where you would be buying Sterling against the US Dollar.