After the usual long summer break, traders and analysts have been returning to their desks in the past couple of weeks and getting up to speed with what has happened in the global economy. Due to these breaks and the traditional thin trading in markets, the July-August period is commonly known as ‘silly season’, where the market has the potential to overreact to stories and move higher or lower in ways that it wouldn’t during the rest of the year.
This was brought home to me in no uncertain terms by a couple of phone calls from journalists last month. At the start of August, as the FTSE100 surged towards (and eventually just through) 5400, the first caller wanted my view on whether we were seeing a new bull market in equities – were traders discounting the prospect of slower growth, now reassured that the recovery had genuinely taken hold? A couple of weeks later, the FTSE100 was falling back towards 5100, and another hack – admittedly from a different place – called me to see if I thought this was a clear sign that the bears were back, and a double-dip recession was looming.
My answer to both was broadly the same – “it’s silly season, don’t look at the short-term moves, step back and look at the big picture and the overall level”. To be honest, this applies generally, not just during the summer. Equities and other financial markets can and do move sharply in response to all sorts of news – indeed, that is arguably part of their value. The problem is that extracting a genuine signal from all that noise can be tricky, although it is certainly not helped when journalists get over-excited and lose sight of the bigger picture.
As I write this on the afternoon of 3 September, the FTSE100 is trading just below 5400 again – back where it was at the start of August, and indeed broadly in line with (or a little above, depending on how excited you get) its average over the past six months. So far this year, equities have not had a sustained sense of direction. Yes, they have clearly recovered from the trough in March 2009, when the FTSE100 hit 3500 and the Fed started pumping serious money into the global economy. But, at the same time, equities are still clearly marked down compared with the 6500+ levels that we saw prior to the recession.
Overall, then, the equity market is probably still looking for direction. The message from bond markets, in contrast, is pretty clear. During August the 10-year yield on US Treasuries – the safe haven asset in the global economy – hit 2.47%, not far from the record low of 2.05% during the nadir of the recession at the end of 2008. (Yields have subsequently risen, but remain below 3%.) The story in Europe is similar, with German bund yields also diving. Bond markets, then, seem to be much more nervous about the recovery compared with the start of the summer – and it may be hard to spot this in equities because, other things being equal, lower yields should push up equity prices.
Are these bond market fears overblown, and just another silly season story? Possibly – only time will tell. But if US yields persist below 3%, these qualms will grow.
However, despite taking some stick from my ‘friends’ about being a bear, I am not too worried yet. The global economic picture is still murky, but stepping back from the individual data releases I think the numbers are broadly consistent with the slow, bumpy recovery that I have been going on about for some time (bearing in mind bumps can go up as well as down). Often, I then get flack about what exactly that means.
So, time for some straight talking. Is the UK recovering? Yes. Are we bouncing back strongly? No – the 1.2% growth in Q2 will not be repeated in Q3, and the economy is still 4.5% smaller than at the start of 2008. Are we rebalancing? Not yet George. Are risks of a double-dip overblown? Yes, at present – but if bond markets do turn out to be a leading indicator, central banks had better be ready with the cash dispensers. Bernanke, for one, understands this. Unfortunately, it is not yet clear that Mervyn, Trichet and co are signed up as well.