Out Of The Frying Pan And Into September
Better than expected Canadian GDP data for June will not be the headline for global markets today as most are focusing on the 2nd largest economy and further detrioration in China's manufacturing sector.
Canada officially endured a recession with 2 consecutive quarters of negative GDP growth on the back of lower energy and commodity prices. The good news is that in June, GDP rose .5%, the fastest since May 2014, led by a rebound in mining, quarrying and oil and gas extraction. Clearly a sign of a potential turnaround.
However, China is clearly on the minds of financial market participants as manufacturing data point to further economic malaise there.
As well, the debate over the timing on the US Federal Reserve's next steps (interest rate "normalization") have been front and centre.
In the background, oil prices have "bounced" considerably from the Aug. 25 lows (37.75) to yesterdays highs near 50.00.
Clearly, as we enter what is historically the most volatile month of the trading year, financial markets have a lot of uncertainty to digest.
As I have repeated endlessly before (and likely will continue to do so long into the future) markets do not like uncertainty and market participants will move out of riskier assets and into safer assets until the crystal ball becomes less cloudy.
Further, as we have also been continually suggesting, equity markets have been overvalued because revenues and earnings (the key fundamentals behind stock prices) are not reflecting reasonable value (although it has improved with the recent sell-off). Instead, low interest rates and cheap costs of borrowing have increased the amount of leverage being used as investors chase returns by taking greater risk.
When they decide to exit this risk (en masse as it appears), volatility spikes. We are seeing levels of volatility that we have not seen since 2008:
(click on the chart to enlarge)
We do know that volatility can bring opportunity to pick up cheap assets, so we are watching closely and waiting for opportunity, but we need more evidence that this situation will not blow up further, so we are exercising patience (which, as we have been for some time, are quite long on).
Long on patience, long on caution, overwieght of cash and looking for opportunity!
Today is "Webinar Tuesday" so feel free to tune in to a more detailed look from our perspective (our recorded version will be released at or about 5pm EDT) at:
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