Three Reasons We Should Fear Summer Markets

It seems clear that the summer markets will be governed by three main strands of fear that have become apparent in the past week or so.

The most obvious is the fear that the Federal Reserve will withdraw stimulus, or ‘taper’ away its asset purchases, too quickly and that US and world growth will be adversely affected. The rises in bond yields that have accompanied the Fed’s desire to scale back its QE program have seen mortgage rates rise dramatically and put the recovery in the US housing market in jeopardy.

Combine this with likely losses in the equity markets, and you can easily see business and consumer confidence suffering as a result.

The 2nd strand is China. We have long been fearful of the propensity for China to spoil the party in 2013, following a poor end to 2012 in growth terms. The latest issue is a new ‘credit crunch’ within bank funding markets following concerns over liquidity. This would be difficult in an economy going great guns. However, China finds itself with the slowest manufacturing growth in 9 months and GDP bouncing along the bottom of expectations.

The key will now be who wins out? Banks wanting liquidity and stimulus or a government that is prepared to take air out of the economy to bring about stability in the future.

The final strand is Europe. On Friday Greece’s governing coalition lost a member party after negotiations around the sacking of more public employees. This leaves the government with a wafer-thin 3 seat advantage.

Needless to say, Greece is not in a position to comfortably sustain political tumult -especially given last week’s IMF notification of a EUR3bn funding cap that could jeopardise the next payment of troika aid. Yields on European periphery debt have risen alongside all other bonds and will continue to do so.

This week should therefore be a volatile one, although the data calendar is quite light going forward. The only reason Europe is not heading dramatically lower this morning is increased bullishness from a couple of high profile mergers over the weekend.

German IFO is the most important piece of news this morning with the index of business confidence set to rise on the basis of increased expectations for the future. Opening up so far, the dollar has been continuing to enjoy the broad based strength of the past few days. Little seems to be able to get in its way.