Market Correction on Wall Street

Tuesday, February 06, 2018

Last week Wall Street fell over 1,000 points, reversing the sharp rises of earlier in the month. Many are now asking if this is the start of a new trend on markets and what it all means for the Australian sharemarket.

Anton Tagliaferro, IML's Investment Director provides his comments:

  • The falls on Wall Street last week have to be kept in perspective of the strong rises in this market over the previous 12 months. The Dow was below 20,000 at the beginning of 2017 and rose to over 26,000 in January 2018 – a rise of over 30%. What is remarkable about this rise is that it came about after 12 consecutive monthly rises in the US market – the first time in history that this has ever happened.  It has also happened with volatility at record lows – with the US VIX index sitting at record low levels for months on end during 2017.

 

  • While the trends for global economic growth continues to be positive with many upgrading their outlook for 2018, this does put pressure on Central Banks around the world to reverse the very easy money conditions that we have seen since the GFC. The US Fed has increased the US Fed Funds rate 3 times over 2017 with further rate rises expected throughout 2018. In our view, at some stage in 2018, the European Central Bank (ECB) - which continues to merrily pump 50 billion Euros a month into the system through its QE programme - also has to acknowledge the improving trends in the European economy and amend its very easy money policy of zero rates plus QE (money printing). The current lax ECB policy has led to the ridiculous situation where European junk bonds or the bonds of financially troubled countries like Greece are now trading at yield below US Government bonds. This situation will have to correct itself at some stage.

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