Financial markets are driven by news. Traders and investors digest news on a daily, weekly and monthly basis. They do this because it's important. It's important because it can influence the direction money takes and the value of existing assets.
For example, if fighting breaks out in Egypt due to political instability, and we then also see it spread to Libya, the natural reaction becomes...well will it spread to Saudi Arabia or elsewhere? And if it does, what does that mean for the supply of oil across the world? Traders start to factor this in (assuming that the price of oil is on its way up) and buy oil. This has two implications. Firstly, economists start to worry that the increase in the price of oil may slow developed economies. Secondly, oil and energy stocks start to rise on the perception of higher short term earnings for those producers.
The bottom line is that news or events have a real impact on the market. It explains why markets have been volatile of late. We've had mixed (but mostly negative) economic news out of the US, geo-political concerns in Egypt and Libya, natural disasters in Australia and Japan, revised growth rates for China, commodity price spikes, and political/sovereign debt concerns in Europe (namely Portugal). It's been a rough ride.
The market has settled down to a degree now though. That's because much of the news of this past quarter has been factored in. That's an important point. If something happens, and the market doesn't respond, you can assume that it isn't market-sensitive, or that it has already been factored into the market. That's why it is very possible that we'll see further tensions in the Middle East in the weeks ahead but the market won't respond. It will definitely respond, however, if feathers are ruffled across the Red Sea.
Traders are now looking for a reason to buy (though not seeing it), while markets are also hoping for a worry free second quarter.
There was a lot of optimism and hope for a V-shaped recovery after the global financial crisis. This simply hasn't been possible given the exogenous shocks we have had, and the state of sovereign balance sheets. What we've basically ended up with is an L-shaped recovery.
Japan's CPI today was also a reminder of where the problems are. It comes down to demand. Their problem with deflation is symbolic of a world that has reigned in a lot of its spending. When confidence builds again, we may start to see this pick up. Confidence can take a while though...
David Taylor
