Have you ever heard of “RED NOSE DAY”? If you were in the financial markets yesterday that’s pretty much how your nose looked as you made your way home after what can only be described as a BLOODBATH!!
I did have a wee laugh when someone on Twitter said the ONLY reason for yesterday’s collapse was Ebola. I have to agree and disagree. Only YESTERDAY I noted 6 reasons WHY we are seeing a routing of stocks globally. Perhaps a quick reminder of what I wrote yesterday (to refresh your memory):
As I said to my business partner, the “straw that broke the camel’s back” was the ABSURD RIDICULOUS IPO valuation of Alibaba not to mention the ABSURD RIDICULOUS price paid by Facebook for WhatsApp. In fact I have written in our blog recently how on earth could Facebook be worth MORE than Coca Cola. It was the former IPO that started the latest free-fall and which has been exacerbated by a number of other CRUCIAL factors which put together has made me VERY VERY worried indeed about the future. Sure the US has shown us in recent weeks that their economy is growing and employment numbers rising. But hidden behind this is a growing concern that could ultimately DERAIL the US recovery and in so doing send us back to 2008 and a recession. Let’s delve a little deeper into what the other factors are (I will be brief):
(1) UK CPI/Inflation – yesterday’s data showed inflation in the UK had fallen to 1.2%. This basically derails my recent rhetoric that rates could rise in December/January….with a target of 2%, yesterday’s number all but puts an end to that (though history has taught us that it is still possible to hike rates in the face of low inflation). That means with an election due in May 2015, the BoE might indeed have to wait until AFTER the elections before raising rates. This spells DISASTER for GBPUSD (ignore vs EUR for now) and therefore I am expecting a deeper correction in GBPUSD over the coming months. The GBPUSD rallied to 1.6080 after US retail sales fell 0.20% and spooked the USD. It has since fallen back below 1.60 and as I noted above I am still looking for a DEEPER correction over the coming months.
(2) GERMAN ZEW/OUTLOOK – yesterday further saw the publication of the German outlook/confidence indicator (ZEW). Last month reported +6.9%. Expectation for yesterday was +1.00%. Reported -3.9%. Germany is the powerhouse and workhorse of the EU. A slowdown in Germany is like taking the coffee out the cappuccino. Tastes terrible and not worth drinking. The ongoing slowdown in the rest of the EU led by the most powerful economy (Germany) followed by France & Italy is testament of the slowdown. The situation in the EU is nothing short of grim, exacerbated by recent Russian sanctions and weak demand for exports. Simply put the EU relies on Germany, France and Italy. A recession scampers any chance of a recovery. European stocks got absolutely obliterated yesterday. Truth is I get the feeling the game plan Pres. Draghi has in mind in just not the right one. Today sees the publishing of EU CPI with 0.30% expected. Inflation is becoming a thorn in all Central Bankers sides no doubt being helped along by falling commodity prices (food) and oil. Consumption is dropping meaning if we combine all the above, we are pretty much staring down the barrel of a shotgun. EURUSD might have recovered to 1.2885 on the rally yesterday but trading just below 1.28 as I write this. I still think overall while there is now likely to be a delay in US interest rate hikes, the trend for the USD remains intact.
(3) EBOLA – Coming to a City near you!! It was obviously not taken seriously enough, and with the movement of people (unlike the last outbreak), Ebola is now a global phenomenon and one which none of us can even try to understand. Not only coming to a City, but also a town near you. Remember the movie “Outbreak”…if only reality was like a movie. I am afraid there is no sick monkey this time, rather a sick world.
(4) FED ENDS QE – The gradual ending of QE in the US (ending this month) isn’t new and we all knew it was coming…but it is coming at a time when it is NEEDED MOST. The global economies always want more QE given their seemingly endless appetite for cheap money. While there was QE in the US and UK (ended) – we are now awaiting the signals that the ECB is going to plug that hole. So far they have disappointed. Regardless of the consequences politically or otherwise, the EU states NEED it. They need to stop playing silly games and pump that QE hole. There has been a lot of rhetoric that once the Fed announces (29th Oct) that QE is finished, stocks should start to recover. That’s fair enough BUT the baton has to be passed to the ECB to ramp up QE on their side, and from what we have seen lately it is too little too late. School boy error if you ask me.
(5) OIL – I went to fill up my scooter the other day and still paid 1.2590/L. As my daughter says (and she got this from Tom and Jerry) – WHAT THE HECK. With oil languishing at $80/barrel sure I was expecting to pay less but with all the other factors going on around us the oil companies need to be making money somewhere. As usual you and I are the victims. I am no expert on OPEC and what goes on behind the scenes but what I do know is the pumps are still pumping yet the “thirst” and need for oil is dropping on the back of a slowdown in global demand. Be under no illusion here, the drop in oil prices will have SIGNIFICANT effects. Further falls overnight, Iran said it will continue pumping…however the Saudi’s need to pull the plug if they want to slow the price drop. Global consumption is falling and with it the need for oil. You cannot flood the market with cheap oil and still hope to make a profit. It is time to cut back. I feel sorry for the royals though, how will they pay for their super yachts, fancy cars, private jets, palaces, champagne and caviar. My heart bleeds.
(6) FIGHTING/CONFLICTS – Ongoing conflicts in Ukraine and the M.E is not helping and investors remain cautious and jittery. The increased conflict could very well see a resurgence of 9/11+7/7 terror attacks on the west which will simply EXACERBATE current turmoil. One thing history has taught me, is that fanatics NEVER go away. They are like bears, they hibernate and wait for a better time to come out to play. I am terrified that events in the M.E will spill over and create havoc elsewhere. Guerrilla warfare is the most difficult to win. You have no idea where the enemy is and more importantly the enemy moves around so much you are playing catch up. Just look what happened with the recent football match between Serbia and Albania. Why can’t people just grow up and stop this immature behaviour.
So later this morning, we will find out the EU’s CPI data for September. The US Treasury Department cautioned yesterday that the EU might fall into deflation as the recent policy measures taken by the ECB have failed to raise consumer prices. How many times have I said this. The ECB are playing funny games and adding fuel to the fire. In the UK, BoE member Martin Weale urged the BoE to consider raising interest rates, citing improving domestic employment conditions. While I was calling for a rate hike in December-January, after the drop in CPI and recent global turmoil (as per above) a delay in raising rates might be the correct decision for now. No point trying to catch a falling knife.
Have a great day ahead and good luck today