The month of September has many potential market moving events: US,
Japan and EU central banks meeting. US presidential debates, OPEC oil
production reduction meeting and worries about the financial state of
Deutche Bank. Turns out, most of these events did not cause too much
impact on the financial markets, despite having some volatility at some
point in time.
However, the actions from central banks are creating confusion within the market rather than bringing more certainty.
The hawkish comments from many US Federal Reserve officials despite not
rising interest rates have investors questioning if the Fed is
politically motivated by the upcoming presidential elections. Meanwhile,
Japan's central bank, contrary to expectations that they will perform
even more QE, it decided selectively purchase bonds to adjust the bond
yield, creating the impression that they have actually ran out of
ammunition. Rumors that the European central bank may start tapering
soon, in view of the ineffectiveness of the QE program contributes to
the impression that the time of easy money may be over soon.
To add to the worries,
IMF issued a warning about the possible consequences
of a record global debt since the 2008 global financial crisis. The
low interest rate environment has also led to a record expansion in debt
in emerging markets in which it can disrupt the growth engines of these
markets. A sudden record surge in property prices in major cities in
China along with a record corporate debt level had the
IMF officers worried
that China's reluctance to let its inefficient state owned enterprise
carry on their business, may lead to a huge disruption in the Chinese
economy should the Chinese government mismanage the economy.
Lastly, the setting of a definite timeline by the UK prime minister has
the world worried about the possible consequences of Brexit all over
again. The UK pound fell to its record low level and is currently seeing
huge swings in its value against major currencies.
In my opinion, the world is balancing on a tight rope, with the easy
money keeping the balancing act in place. However, the recent reluctance
by central bankers to either cut interest rates to even deeper negative
regions or to increase the QE program has indicated that the central
banks have run out of options to keep the economy going via monetary
policies. In the world of investing, expectation is the key that keep
asset prices going up, but once the expectation changes, market shocks
tend to occur.
At this moment in time, bond prices and equity prices are at record
highs, a phenomena that is almost never seen as bond prices and equity
prices tend to move in opposite direction. This situation can only be
explained by the impact of the QE and things may get ugly once investors
come to realization that the central banks are helpless to do anything.
The only value I see in the market is the commodity market, thanks to
the corrections made in the past 2 years. Other than that, I am
generally reluctant to invest in long term bonds or equities given that
the risk is great while the return is slim.
