Can you make sense of what is going on in the equities markets?
If you can make sense of what is going on in equities markets right now you’ll make a fortune.
After falling 2,000 points earlier in the week, Wall Street staged a bit of a recovery on Friday. That spurred on Asian and then European markets on Monday, which in turn once again fed into Wall Street at the start of the week.
Ten minutes after the Dow Jones opened on Monday, it was up 300 points, taking it back to 24,487. The S&P 500 was up 30 points to 2,650, while the Nasdaq was up 78 points to 6,952. Across the three main US markets, the rise was around 1.3 per cent.
Europe’s three main equities markets – the FTSE, Dax and the Cac-40 – were all up by a similarly bullish margin.
But with US 10-year Treasury yields back at a new four-year high, US markets should be in free-fall, right? That’s what happened just over a week ago. So what’s different this time?
High-frequency trading
It may be a belief that the sell-off last week was an over-reaction and a correction too far.
Alternatively it may all be the fault of artificial intelligence or stock market algorithms. On Monday morning, the Financial Conduct Authority (FCA) warned as much, saying that while automated technology brought significant benefits to investors – including increased execution speed and reduced costs – it could also “amplify certain risks”.
Or it may be as simple as Monday’s announcement from the White House that it will unveil a long-awaited infrastructure plan that includes $200 billion in Federal spending over 10 years.
The truth is no-one really knows.
Reaganomics redux
Infrastructure spending makes sense for President Trump. He considers himself a builder, having made his money in property development.
But it’s also a plan straight out of the Reaganomics playbook. Few presidents – if any – have built as much President Reagan did in the 1980s.
Will President Trump’s infrastructure plan benefit the US economy? Almost certainly.
But he has to pay for it somehow and is reluctant to raise taxes to do so – unlike Regan – which means more borrowing by the Trump administration, which means more bonds being issued by the US Treasury.
How this will be greeted by Wall Street we will have to wait and see. But the US Treasury issuing more debt is unlikely to be welcomed, even if the spending on infrastructure is.
Inflation
And while Monday offered some respite from the drama of the previous week, it hasn’t necessarily gone away.
We may find out just how volatile the markets can be again on Wednesday when US Consumer Price Index inflation data is released.
Should the inflation fears expressed by some investors last week be realised, it’s possible we will see another big sell off over fears the US Federal Reserve could raise rates more quickly and more often than expected.
Whether the sell-off is as big as last week is another matter, but US equities remain in volatile mood.
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