The global market sell-off? Probably a storm in a tea cup


05 Feb, 2018

The global market sell-off? Probably a storm in a tea cup
The current global market sell-off is likely to be a storm in a tea cup, affirms a leading global analyst at one of the world’s largest independent financial advisory organisations.
Tom Elliott, International Investment Strategist at deVere Group, is speaking out as shares fall in Asia and Europe after Wall Street suffers its largest drop since the Brexit vote.
Mr Elliott comments: “The current global market sell-off is likely to be a storm in a tea cup.  We will probably see a recovery rally within the week and by next Monday analysts will be referring to this as having been a ‘much needed correction as part of an ongoing rally’.
“Financial history is full of false warnings of imminent bear markets – but right now we miss any key component, with no imminent recession in a major economy, no financial crisis, no one particular over-extended sector of the economy or stock market.”
As to why there is a ‘sea of red’ on global indices, Mr Elliot explains: “Last week’s sell off was attributed to rising Treasury bond yields. The 10yr yield has jumped from 2.43% to over 2.8%. While most investors were braced for rising bond yields, they weren’t expecting the pace to be so rapid. Many bond analysts were expecting the 3% mark not to be reached until end of the year, whereas it now looks much nearer.
“The rise in bond yields reflects investors suspicions that inflation will become a problem, and so they are demanding higher yields to protect them. This fear comes from a steady upgrade to global GDP estimates over the last 12 months (the IMF increased its world GDP growth estimate for this year to 3.9% 10 days ago); further weakness for the dollar in January, raising U.S import inflation; and the likely inflationary effect of Trump’s tax cuts as companies invest more and household income taxes are reduced.
“Strong global growth is good for corporate earnings, so at first glance good for stock markets. But if bond yields are falling for fear of inflation, and central banks push up short term rates for the same reason, stocks suddenly look less attractive relative to the juicier yields now available on bonds. The so-called ‘risk-free’ investment options, of bank account cash and Treasuries, start sucking money out of stocks. The fear is that corporate profits will falter as higher borrowing rates make debt more expensive to service and curtail investment, and as consumers are deterred from borrowing to spend in the shops.
"On Friday U.S. labour market data showed an unexpected leap in wage growth (to 2.9%), and greater than expected new jobs growth. This was the straw that broke the camel’s back, but the back had been weakening anyway.”
Mr Elliott concludes: “Investors should remain in the market and with a properly diversified portfolio to take advantage of the opportunities and help mitigate the potential risks. Inflation does not appear a realistic threat at current levels and the Fed is unlikely to alter its cautious approach to monetary tightening”.