During the last week we have had a slightly positive tone in most major stock markets, even though the Ibex 35 index closed the week in red. Strong corrections have been taking place recently, with ups and downs of more than 7% in Japan. But these corrections seem to have passed away. We predict that the market will continue with a bullish tendency, but we strongly recommend to be very aware of these neglecting volatilities that will not leave us at least until China and Europe settle their situations. The BRICS are losing their leadership in the international markets. With all the world’s eyes looking at China, and every day investors are more convinced that the Chinese government has been lying about the real situation of the Chinese economy. Brazil is drowned in corruption, Russia facing conflicts in East Europe and the Middle East, and South Africa that has never really taken off… The world’s GDP is not going to increase in the following years due to a general collapse of all cores of power.
The only “global economic engine” that seems to be working (just fine) is the United States. Creating more than 200.000 jobs per month and substantially reduced imports. Europe is struggling with the debt crisis and the IMF has already given some clues about the coming years. Not joining the European plan to the Greek bail out, was somehow insinuating that in the next 5 to 10 years Greece will be again in the same situation than few months ago. Greece is again in the spotlight with the elections this weekend. They do not expect great changes to the terms of the bailout that were agreed in July, so do not expect great tensions in Europe during the next weeks. If before the summer most analysts pointed out to this meeting as the start date of the rate hike in the US, after the behavior of the markets, extremely volatiles this last August, rising now interest rates does not seem so clear. It is true that continuous improvement of the employment rates in the US economy will sooner or later rise that rate, but currently US wages are not pushing up inflation. Knowing beforehand the overall effect, especially in emerging markets, a rise in the Fed, if eventually raise rates this week will give a clear signal to markets that the American monetary authorities somehow leave aside global economies to focus on its economy. The Fed has had the lowest interest rates in the history of the United States, for more than 8 years. In 2007 the Fed started to lower the rates, all the way to the 0.05%.
But what can be the effects of this rise in financial markets?
A rise in interest rates, by definition, affect the most indebted companies, but also adversely affect the prices of sovereign and corporate bonds. Globally,emerging markets may be the hardest hit, having a large flow of foreign exchange into the dollar. This increased demand for the US currency will favor international investors own investments in USD. A European investors, the divergence between monetary policies central banks favor the depreciation of the Euro against the Dollar. China continues to show signs of economic slowdown. We believe that the most intense corrections in the Chinese stock markets have already been made, dragging the rest of the world and especially to the Asian economies. So stability in the Asian markets is what we expect. Europe is the region where prices seem very attractive to retake positions. However, for the moment we prefer not increase the risks in the portfolios of generalized way. Volatility levels have been reduced, but currently still above any month.
Volatility Index (VIX)