Fall in global markets 'a correction'
Markets in the US and Asia registered sharp falls overnight building on the decline seen at the start of the week. In New York, the Dow Jones shed another 1000 points putting it 4.1% lower in the day and more than 10% off its recent record high.
Owen Callan, Financials Analyst with Investec, described the couple of days of calm midweek after sharp falls on Monday, as a 'dead cat bounce'. He said the sharp falls in the global markets is not a deterioration in fundamentals. "This isn't a more worrying long term issue that we're facing here. It's what we would perceive to be a short term problem where there has been too much complacency around volatility where people got used to that 7 years where we've seen very, very stable markets supported by centrals banks."
Mr Callan said people will have to reassess where the volatile parts of the markets are, where the risk assets truly are, and where correlations truly sit.
The narrative for the past week has been that the drop in the markets is a correction. Mr Callan's asssesment is that that is still the case, given the fundamentals that he said are growing strongly in the global economy.
"In the US, we are looking at 3 to 4% GDP growth which we haven't seen in quite a while," he said. "In Europe, we're seeing a very strong recovery start to ferment itself, and yesterday, the Bank of England acknowledged that domestic and global economic conditions had been stronger than they expected only 3 months ago. So we do have a very strong economy out there, albeit, the markets might have run slightly ahead of themselves, and as I said, the complacency around the volatility, and it being a one way easy bet, needs to be reassessed. People need to be a bit more savvy about what they are expecting going forward."
Mr Callan said people are reassessing the outlook for wage growth, the outlook for inflation and the outlook for central bank reaction to that.
In Europe, the ECB acknowledge that their QE programmes may need to come to an end towards the end of this year, and the Bank of England acknowledged that they may need to increase the pace of very moderate interest rate hikes on a quicker basis than what they had expected. "So we are seeing higher rates priced into bond yields and the interest rate curves," he said. "We are seeing a higher expectation for wage growth and inflation, and that's just making people reassess the profitability of companies, the earnings potential of companies, and maybe where the fundamental valuations need to sit six months or a year out."