For the second time since Friday, stocks and bonds have sold off together, leaving investors few places to hide. Equity markets and Bonds have been held up by accommodative central bank actions around the world. Now that there are signs of a reversal, with the Fed looking to hike interest rates in the near term, and comments by the European Central Bank that it is pausing in terms of expanding further stimulus, we are likely to see a correction in market prices (in both equities and bonds). Markets have become dominated by central banks globally across all asset classes, and moves by the Fed continue to dominate headlines ahead of the all-important Fed meeting next week. continue to believe the September Fed meeting is very much “live”, and the market may be underestimating the probability of a hike. Markets have emerged from an exceptionally quiet trading period with whipsaw moves, and we are watching developments closely. As we have mentioned as recently as last week, given the high levels of the market combined with the low volatility, a downward correction later this year is certainly possible.
Equity markets had been trading at high valuations (more so the US and NZ markets compared to the AU market), and fund managers have been echoing this sentiment for a while. Bond markets are clearly overvalued, and moves by the Fed could see bond prices fall significantly, in our view. Local markets appear to be at the whim of US moves and Fed sentiment right now. Following Friday’s rout in the US, both the ASX and NZX were down more than -2%. The move ended a period of remarkably low volatility, and now that earnings season is more or less over, investor focus usually switches back to economic issues. As we have mentioned as recently as last week, given the high levels of the market combined with the low volatility, a downward correction later this year is certainly possible.
In saying that, as discussed yesterday If the market does sell off in anticipation of a rate hike, we think it will recover pretty quickly, although this part of the year historically has 20-to-25% more volatility than any other time of the year. So if a significant sell-off was to occur on the back of rate hikes in the US, we would see the pullback as more of an opportunity to buy selected companies (which we see as quality investments with strong thematic tailwinds). We think that that this maybe a good opportunity to take a rigorous look at your portfolio and maybe re-position as the market trends a bit lower. Next weeks Fed decision will be very important for global market sentiment and could drive not only the US share market but as experienced this week, local Australasian markets as well.