EQUITY markets around the globe seem to be in the middle of a correction, as investors begin to fear that the inevitable removal of central bank stimulus might come sooner rather than later. This has led to some profit-taking, with indices pulling back from recent highs. The final month of what has been a spectacular first half of the year has started firmly on the back foot.
Markets don’t always go up in a straight line, and every investor knows that they are susceptible to a pull-back here and there. Currently, the question on everyone’s lips is whether the selling has further to go before we see another leg higher. Or have we really reached the top, as realisation dawns that central banks will soon be leaving economies to their own devices?
Interestingly, European markets have reacted far more nervously to the prospect of the US Federal Reserve tapering its stimulus sooner than many anticipated. The FTSE 100 and Germany’s Dax have retreated 4 per cent and 2.5 per cent respectively from their 2013 highs. The Dow Jones, meanwhile, has barely battered an eyelid – only coming off some 1 per cent. Yet it is the US central bank, and when it will stop printing money, that everyone’s most worried about.
This is possibly a good indication that the bull run isn’t finished just yet, and it’ll take a great deal more good economic data to slow down the quantitative easing-fuelled rally we’re currently experiencing. The blame for the recent turnaround in stock markets seems to have been laid at the door of economic data being worryingly good, which can only be described as totally bizarre. Good economic figures mean that the medicine is working and, when it comes to the time to wean ourselves off stimulus, we’ll be in a better position to carry on without the assistance of central banks.
But a good spate of economic figures doesn’t mean that central bankers should act too hastily. For every one good piece of data, there seems to be at least another bad one to match it. You only have to look over the continent, where things remain very tricky for much of the Eurozone. There, austerity timescales are being pushed back as small, medium and large economies struggle to overcome their economic malaise. The European Central Bank continues to mull over whether it should take a leaf out of the books of central banks in the US, UK and Japan to ramp up stimulus, as unemployment remains desperately high.
Stopping stimulus too quickly could easily end in tears and so normalisation of monetary policy ought to be well-timed rather than too rushed. This Friday’s non-farm payroll data will be an interesting one to watch, to see how the market reacts. If we see a good figure, there may be some pressure to the downside, as the Fed could turn off the taps sooner. However, if the data continues to impress, it may not be long before investors appreciate that good data really is just that.
Angus Campbell is head of market analysis at Capital Spreads. You can follow him on Twitter @angusjmcampbell
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