Jul 8, 2017

Will Central Bank Tightening Derail the Bull Market?

The Trump bull rally that has been raging in the past few months have come to a halt in June. Let us take a look at some of the significant events for the month and its complication.

Mess at UK Election

The UK Prime Minister Theresa May called for an election in a bid to strengthen her coalition going into the Brexit talks with the European Union. Her lead in polls have been derailed by a series of campaign communication errors and terrorist attacks, leading to the Conservative party in losing their parliamentary majority. 

Results:  The stock market barely blinked at this political disaster. 

Oil Market Crash

The oil market went into a bear market, despite efforts by the OPEC nations and Russia to pop up the price via production cuts. The US shale producers increased their production in respond to the rising prices creating a sudden surge in supply in the market. Oil price fell to $42 from a high of $57 seen at the start of the year.

Result: The decline in the stock price of Oil companies dragged down global stock prices

Central Banks Increasingly Hawkish Stance

Other than maintaining their stance of 3 interest rate hikes for the year, the US Federal Reserve is looking to unwind their 4.5 trillion balance sheet as a result of securities buying due to Quantitative Easing. The EU central bank also noted that the European economy is getting stronger and it may be time to start tapering on their QE program. China's debt level reached a new record level again, prompting Moody to downgrade its credit ratings. The Chinese central bank, in a bid to lower the leverage level, has been unwinding the loose monetary policies implemented last year to stabilize a crashing stock market and slowing economy. 

Result: Stock market tumbled as the fear that one of the key drivers of stock market returns may be removed in the near future.

Technology Stock Slipped 

Major technology stocks slipped during June despite not having any major driver for its downtrend. Analysts are worried that the valuation of technology stock has risen too fast too much in the fast few years.

Results: The Tech stock decline affected the US Stock market and the impact is much greater than oil companies as the result of the higher weightings in the S&P500 as compared to oil.


What does this mean?

Some say that this is a foreshadowing of a major correction in months ahead as a result of an irrational run for the past few months. Some say that it is a temporary blip and the market fundamentals are still strong. In my opinion, I will watch the actions of the central banks closely and if there is a tightening of monetary policies around the globe, the high debt level that has been accumulated as a result of a prolonged zero interest rate environment will come back to haunt us.

On another note, Jim Rogers thinks that the market may crash this year.

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