Why the market pullback?
Markets took a hit last week as a bunch of factors, including US inflation concerns and a technical default in Argentina, spooked investors. In our view, there are two main drivers for the pullback....
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Wealth Know How is the online network helping people manage their wealth through financial education. Whether you are looking for simple ways to better manage your cash, or you are after a complete strategy on how to save for retirement, we can help you understand your options. It is important to have a vision for your future, but its knowledge not dreams that will ultimately deliver financial success.
Published on 05 Aug 14
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Markets took a hit last week as a bunch of factors, including US inflation concerns and a technical default in Argentina, spooked investors. In our view, there are two main drivers for the pullback....
Sponsor - Wealth Know How
Wealth Know How is the online network helping people manage their wealth through financial education. Whether you are looking for simple ways to better manage your cash, or you are after a complete strategy on how to save for retirement, we can help you understand your options. It is important to have a vision for your future, but its knowledge not dreams that will ultimately deliver financial success.
-
Venezuela tension heats up
Duration 03:16
-
Aussie dollar surprises market
Duration 03:10
-
Markets climb as investors watch US healthcare bill
Duration 02:31
- It was time. The market had risen a long way and historical volatility had fallen very low. Volatility is a mean reverting process. It was only a matter of time before the probabilities won and there was movement down.
- US inflation threat. The debate about whether the Fed can control inflation has been reignited following better than expected GDP growth; strong manufacturing surveys; higher than expected compensation; and a good but not great US employment report. This has led the market to change its expectations about US inflation, increasing the probability that interest rates in the US may rise in the first half of next year rather than the second half.
A number of other factors have also contributed to the pullback. These include:- Softer corporate earnings outlooks in Europe, particularly Germany going forward. This is being driven by the sanctions against Russia and the softer than expected European economy.
- Argentina’s technical default; and banking issues in Portugal also weighed on markets.
Putting all that aside, there is a lot of good news for the market to digest as well. We expect the sell-off to be short lived. Highlights from three of the four major economies include:- China stimulus appears to be working and picking up the slack from a slowing property market
- The US earnings season is above expectations and on track for 9% growth.
- The US economy is picking up; consumers appear to be coming back; credit growth is picking up; and manufacturing is doing well
- Japan appears to be improving and the YEN is weakening against the USD; which will be good for the Nikkei 225.
Finally, we are seeing normality return to the FX market with the US dollar rallying against the YEN and the Euro. The market has been expecting this to happen for some time, since tapering began, but it was slow to get started. The market is now becoming convinced that the US is improving significantly against Europe. The final step to make commentators happy is for long bond rates to start selling off and for yields to approach 3% again.The Australian Dollar and Australian equity market has held up relatively well amongst all this.