UNRESOLVED ISSUES CAUSE HEADACHES
DAVID MORRISON
CFD MARKET STRATEGIST, GFT
MOST investors will be relieved to see the back of May and hope that June will usher in greater market stability and lower volatility. The last month has been a shocker, with only the relief rally at the end of last week ensuring that major indices avoided a fall below the 10 per cent “correction threshold”.
Considering the number of major events that unfurled, perhaps we shouldn’t be surprised by the surge in market volatility. As the month kicked off, we were still dealing with the disruption from the Icelandic volcano. Then the UK general election produced our first coalition government since the Second World War. There has been civil unrest in Greece and Thailand; the disastrous oil spill in the Gulf of Mexico; the 6 May US flash crash; rising tensions between North and South Korea; the near-$1 trillion European bail-out and the naked short-selling ban by Germany.
Meanwhile there are other unpleasant noises coming from under the bonnet of the global economic engine. Three-month dollar Libor (the London Interbank Offered Rate) has been rising steadily and is now back to levels seen last July. Libor is the benchmark rate that banks use to borrow and lend to each other and measures perceived risk. It has doubled since the beginning of the year to just over 0.5 per cent. The higher it is, the more nervous banks are about dealing with each other. Libor is expected to carry on upwards, but hopefully it will stay well below 4.8 per cent – the rate hit after Lehman collapsed.
But the trouble for investors is that many of May’s issues remain unresolved. US regulators doubt that the true reasons behind the flash crash ever will be known; the Gulf oil spill continues to wreak havoc; further strikes across Europe are planned; geopolitical tensions remain – on the Korean peninsula, Iran and Israel – while the European crisis continues to unfold. Oh, and it’s jobs week in the US, culminating with non-farm payrolls on Friday. That’s quite a high wall of worry.