Stock markets around the world are hitting record highs. The global economy appears to have stabilised. Inflation is subdued, and there is still some growth left in this business cycle.
Even the Eurozone’s permanently fragile banks have passed their latest round of stress tests and Brexit, for all the hype, turned out to be as big a shock for the global economy as Taylor Swift’s latest break-up! It looks like we can all head off to the beach somewhere but for one reason – it is August.
August is usually the most torrid month for the markets.
- The credit crunch started in August 2007 when a couple of hedge funds closed to withdrawals
- The Russian financial crisis started in August 1998
- August 2011 saw the Eurozone financial crisis hits its peak, with Italy and Spain close to insolvency
Where could an August 2016 shock come from?
1. The Bank of England relaunches QE
Post Brexit the Monetary Policy Committee to cut interest rates to 0.25% and have given the UK economy a significant fresh blast of printed money i.e.Quantitative Easing. This appears good for the stock market at the moment but it is possible market sentiment may change if the domestic economy starts to show post Brexit significant weakness and this could give the markets a scare. Watch out for UK GDP figures on the 26th of August.
2. A Trump surge
Hilary Clinton is currently six points ahead in the polls for the November US Presidential elections. As August comes to a close, unless Clinton is way out in front, investors are going to start wondering whether Trump might actually win. His toxic mix of protectionism, industrial intervention and strategic isolationism could be catastrophic for global growth.
3. A unicorn fund-raising disappoints
A wave of tech euphoria is helping propel the markets upwards – just look at the $35 Billion valuation put on the Chinese web-based taxi service Didi for its deal with Uber this week.
Vast sums of money have been tied up in some very new, untested business. There are now 229 unicorns – that is tech start-ups worth more than $1 Billion. Some, but far from all, will be fantastic success stories. If one major unicorn falters, that could trigger a wave of panic selling and, in illiquid markets, that always causes a crash.
4. A German bank fails
Despite the latest stress tests , the markets have already assumed Italy’s banks are bust. They can take that in their stride. But a German bank?
Deutsche Bank’s share price has been looking horrible all year – this week the shares are trading at under EUR 12, a multi-year low (they are down from EUR 33 in 2014, and EUR 100 a decade ago).
Commerzbank – down from EUR 12 to less than EUR 6 in the last year – doesn’t look much better.
5. The Shanghai market shuts
It was China that led the downturn last August, with frenetic trading as small investors tried to get out. The Shanghai index dropped from 4,000 to less than 3,000 in the space of a few days, and on August 24 triggered the sharpest sell-off on Wall Street in four years.
Not every August sees a correction in the markets. But with valuations already at record highs, or close to them, then a wobble at least seems more likely than not.
Equities
S&P 500: 2170
Nasdaq: 5180
FTSE 100: 6700
Bonds – 10 Year Government Yields
US 1.50%
EU -0.16%
GB 0.85%
Foreign Exchange
EUR/USD 1.1100 (1 euro buys 1.1100 dollars)
GBP/USD 1.3100 (1 pound buys 1.3100 dollars)
Commodities
OIL: Brent: 41.00 (dollars per barrel)
GOLD: 1350 (dollars per ounce)
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Paul McCormick
