Markets have turned glum again as October gets underway and the northern winter looms, weighed down by a relentless grind of negative commentary even if there’s been little really new information to digest. The net loss on MSCI’s world stock market index over the past seven days is a fairly restrained 1.5%, though we are now back down to early September levels. Debt markets have been better behaved. The likes of Spain’s 10-year yields are virtually unchanged over the past week amid all the rolling huff and puff from euroland. The official argument that Spain doesn’t need a bailout at these yield levels is backed up by analysis that shows even at the peak of the latest crisis in July average Spanish sovereign borrowing costs were still lower than pre-crisis days of 2006. But with ratings downgrades still in the mix, it looks like a bit of a cat-and-mouse game for some time yet. Ten-year US Treasury yields, meantime, have nudged back higher again after the strong September US employment report and are hardly a sign of suddenly cratering world growth. What’s more, oil’s back up above $115 per barrel, with the broader CRB commodities index actually up over the past week. This contains no good news for the world, but if there are genuinely new worries about aggregate world demand, then not everyone in the commodity world has been let in on the ‘secret’ yet.
So why are we all shivering in our boots again? Perennial euro fears aside for a sec, the latest narratives go four ways at the moment. 1) The IMF’s World Economic Outlook (WEO) downgraded world growth and its Financial Stability report issued stern warnings on the extent of European bank deleveraging 2) a pretty lousy earnings season is just kicking off stateside, 3) U.S. presidential election polls are neck and neck again and unnerving some people fearful of a clean sweep by Republicans and possible threats to the Federal Reserve’s independence and its hyper-active monetary policy 4) it’s a new quarter after a punchy Q3 and there’s not much new juice left to add to fairly hefty year-to-date gains. Maybe it’s a bit of all of the above.
But like so much of the year, whether the up moments or the downers, there’s pretty good reason to be wary of prevailing narratives.
On 1) the WEO downgrades: These have been flagged by the Fund for well over a fortnight and were relatively modest given some of the worst fears out there. Many economists argue IMF forecasts were far too sanguine in its last July update and are only now being corrected to reflect the well-documented summer doldrums. That doesn’t make the world a pretty place all of a sudden, but it does question why this alone should be an especially new factor to investors or market traders. If anything the most recent signs from global PMIs and the US housing or labour market show some stabilisation rather than deterioration. The Fund’s euro bank deleveraging estimate was also upped to $2.8 trillion by end-2013 from a $2.6 trillion call in April. Again, the scale of the forecast change is almost a margin of error — not because the nominal $200 bln adjustment is small but because of the “guesstimate” nature of the forecast. It’s also not clear how much it takes account of the welter of policy action in the pipeline and there are signs from the likes of Fitch and the European Bank for Reconstruction and Development that the frontline of this banking retreat at least – central and eastern Europe – is not suffering as much as was originally feared. That may change, but it’s not at all different from what we already know here.
On 2) and the earnings season: the big question is how much of the dour earnings pre-announcements and profit warnings (the worst ratio of warnings to positive guidance since 2001) have already been built into prices. It’s reasonable that the market braces for some negative surprises and gloomy corporate outlooks, but it’s hard to imagine anyone is unprepared for the Q3 numbers per se. Alcoa was first out of the traps as ever this week and a good snapshot of the overall picture – underlying aluminium demand is weakening, but its earnings actually beat the well-prepped forecasts. JPM is up on Friday. But the “real economy” global bellwethers of GE, Google, Microsoft, Intel and IBM next week may be more telling than what the big banks show.