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Portfolio > ETFs > Broad Market

Investors Head for Exits, Fearing QE Pullback

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Global markets spiraled downward in the second week of June on numerous concerns, including the possibility that central banks would lessen stimulus actions. The gloom intensified June 13 when the World Bank cut its growth forecast for global GDP in 2013 to 2.2% from the 2.4% it had predicted in January, citing a deeper than expected recession in Europe accompanied by slower emerging market growth—including among the BRIC nations. The damage in Europe moderated somewhat on merger and acquisition news on June 14 as markets regained some ground, but the skies are by no means clear.

Investors, already spooked by eurozone troubles and slowing economic growth in China, reacted sharply to the May 22 hint by Fed Governor Ben Bernanke that quantitative easing could be cut back at some time in the future. When the Bank of Japan announced June 11 that it would take no additional action against climbing bond yields—yields that threaten to counteract its $1.4 trillion stimulus program—that announcement, and concerns that other central banks would follow suit, triggered a Nikkei selloff; the market dropped 6% in a single day.

The Nikkei was already into bear territory, losing some 20% since mid-May, and worried investors seeking shelter sent the yen soaring in value even as Japanese exports tumbled—exactly the opposite of what Prime Minister Shinzo Abe had hoped to achieve, as exports became more expensive and less desirable on the world markets.

Japan certainly faced a quiver full of problems as markets fell. In addition to all these worries, the absence of any action that could be what Abe had termed the “third arrow” in the quiver of Abenomics made investors begin to question whether Abenomics could indeed do as the prime minister intended: stimulate the Japanese economy out of its decade-long stagnation. The third arrow was supposed to be new trade-friendly legislation to spur private sector investment, and thus far it remains unloosed.

But Japan is far from investors’ only concern when it comes to global investing, and Japan’s was not the only market that fell.

The benchmark interest rate at the Bank of Korea remained unchanged, as did the official cash rate at New Zealand’s central bank. The eurozone’s problems are of course far from over, and worry over Greece’s political stability raised its head once again as the shutdown of the state broadcasting system raised concerns about the viability of Greece’s ruling coalition—an uneasy alliance at best.

Turkey’s eruption into violent protest has also caused many investors to head for the exits, with the turmoil there adding to instability in other parts of the world and pointing out that politics can prove to be risky business, no matter how far from home its actions play out.

Slowing growth in China is worrying even the Lucky Country, which contributes a large chunk of Australian exports to feed China’s seemingly endless hunger, to the benefit of its prosperous economy. However, that hunger may be subsiding—and amid talk of problems in China’s financial sector, other countries dependent on the booming Chinese economy are starting to consider other alternatives.

Not only Australia’s market fell, but other Asian markets—Shanghai, Hong Kong, South Korea and the Philippines, among others—took the downward plunge. European markets fell, along with the U.S. Gains here and there did offset some of the losses at the end of what had been a very bad week, while markets moderated a bit and the yen backed down a little at the open of the new week. Still, confidence has not returned.

Considering whether the most important takeaway from the markets’ slide are the worries that sent markets down in the first place, or the economic data that leveled things out, Chris Williamson, chief economist at Markit Economics, provided a graph (below) that compared global share price momentum to global PMI.

Said Williamson, “The chart … shows that equity prices generally remain far higher than the appropriate level suggested by economic fundamentals. The global PMI, which measures monthly changes in output at the world’s factories and service sector companies, is signaling only modest global economic growth in the region of 2–3%. The divergence between the PMI and equity prices compared to their 12-month average remains one of the highest that we’ve ever seen, exceeded only by the stimulus-fueled bounce-back in equity prices in late 2009 and early 2010.”

He continued, “This divergence highlights how much of the rise in equity prices since the low seen last June is reflective of central bank stimulus rather than rising activity at companies. Unless activity, as measured by the PMI, picks up sharply in coming months, the increase in equity prices over the last year looks overdone and an even sharper correction than we have seen in recent weeks looks possible. A combination of disappointing activity growth and the withdrawal of stimulus would of course be a double hit to equities.”


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