Thursday 31 January 2019

Market calm - what does this fortell?

One thing that has surprised me is the reaction of the markets to Brexit. Given that over 50% of market activity is driven by short-term trading algorithms, all programmed to try use data about everything including political risk, it is a surprise I would think to many that  really they are so calm.

Of course, last year was a bad year for the FTSE 100 and FTSE250, a bad losing year in terms of value, but it was across the West. The NYSE is also down 9% over the last 6 months, the FTSE at 12% is within a margin of error. Even the Shanghai composite is down around 5%.

At best you could say there is a little topper on the downside from Brexit but the trend is the trend. Without Brexit the FTSE would undoubtedly still be significantly down. As usual, there are a number of factors at play, here are my top 3:

a) "Buy the Rumour, Sell the News" - the reality of the hit to the FTSE from no deal will perhaps only happen the day that no deal is agreed, just as the bounce for a withdrawal or revocation of Article 50 must await the act, not the discussion.

b) Given the FTSE is full of dollar based multi-nationals, the real drivers are global macro such as the China-USA trade war, general slow down in the world economy, the rise of digitisation in every aspect of company life, uneven growing global population and resource extraction. Brexit is a long-way down this list.

c) No one knows what  the effect is of even a Hard Brexit. Clearly some industries with just in time manufacturing have issues, but many do not - take lawyers for example, Brexit means more productivity not less, how it works out in the round is hard to fathom in the era of project Rapture and Fake news - even for the algo's.

It will be interesting to keep an eye on the markets though for signs of economic stress over the next two months.


Thud said...

Some decent 4Q results coming in for Dow etc companies (6% plus div increases too) and the market doing fine,a China deal and Trumpy is up and running again.

Lord Blagger said...

Buy volatility

Nick Drew said...

You think it's underpriced? In short supply?