The market volatility of the past two weeks has been astounding. While the broad factors are obvious, markets are not beasts that lend themselves to easy analysis and the nuances really matter here. A few broad factors at play are feeding off each other. All have been discussed and debated, but here’s a rundown on the interplay I see taking shape.
1) Euro breakup not so far-fetched
How do you hedge against the potential collapse of a single currency used in a $13 trillion economic zone plus trillions more of securities and derivatives? Not easily. A splintering or breakup of the euro has gone from unimaginable to a risk that can’t be ignored altogether. Europe’s inability to get ahead of the crisis now means a sovereign debt crisis is fast becoming a banking one. The solutions — a super sized EFSF rescue fund, Eurobonds, a commitment to fiscal union — are there to be had. But the political will is lacking.
I’ll get to inflation in a second. Last week was one of those classic weeks where contradictory factors were cited as being factors hurting risky assets, suggesting that neither was really that much of a factor. Supposed worries about global economic growth were blamed (how many times have we heard this before). Yes, U.S. first-quarter growth forecasts have been cut as consumer spending has not come out as strongly as expected. But some economists, such as Lou Crandall at Wrightson ICAP, are expecting this to be a mathematical head-fake (blame national income accounting) that belies the strength seen across indicators. China’s trade figures for March, the first not to be impacted by the Lunar New Year, showed robust growth both domestically and abroad, as reaffirmed by the roaring GDP figures for Q1.
Suddenly this morphed into an inflation worry story for China on Thursday and Friday, even as the Shanghai Composite showed little reaction — both to the supposed inflation fears and the actual Sunday hike in bank reserve requirements. Food prices remain a sensitive issue in China, as well as the country-specific issues confronting India. But in China and elsewhere, a bevy of measures have been taken to ease the pain. The commodities story is one that gets simplified but is complex: several individual markets have faced supply shocks. After the shock, many prices — especially softs and grains — have leveled out and are off this year’s peaks.