US and European stock markets rebounded yesterday, but the danger of ever more volatility kept investors’ nerves under strain.
Wild price swings accompanied last week’s heavy stock market losses, the worst weekly equity slump in years, making it hard for investors to read the market with any degree of confidence from one moment to the next.
London’s FTSE 100 gained 1.2% at 7,177.06 points, Frankfurt’s DAX 30 climbed 1.5% to 12,282.77 and in Paris, CAC 40 was up 1.2% to 5,140.06 at close yesterday.
“Investors are breathing a sigh of relief after the torrid times last week,” said Rebecca O’Keeffe, head of investment at Interactive Investor.
“Buying the dip (bargain hunting) has been a very difficult call in recent days, with every attempt at engagement punished in subsequent market moves, so investors will be hoping that this is a genuine buying opportunity.”
But such hopes may well be premature, some analysts cautioned.
“Investors will be aware the calm probably won’t last,” said Jasper Lawler, head of research at LCG.
Brokers Charles Schwab described Wall Street as remaining “skittish” while Capital Economics calculated that the valuation of American stocks “appears stretched by most measures” even after last week’s brutal correction.
Michael Hewson at CMC markets, meanwhile, said that there is “a whole new breed of equity investors and traders who have never experienced the type of volatility that we’ve gone through over the last few days”, making their “untried reaction” another factor of market uncertainty.
At the heart of market worries lies the rapidly rising likelihood of monetary policy tightening by key central banks, notably the Federal Reserve, but also the European Central Bank and the Bank of England, as inflationary pressures build up.
Analysts are now predicting that tomorrow’s US inflation report for January, coupled with fresh retail sales data, may well spark another rollercoaster ride for equities if they confirm inflationary fears.
A weak reading, however, may give US monetary policymakers a reason to hold off on raising rates at a faster clip.
The sudden market fragility comes after a stellar 2017 and a January that saw record and multi-year highs for stock markets around the world, after years of post-financial crisis stimulus.
But as central banks pull back, there is now concern that big spending plans by the US government may boost the budget deficit, making the case for higher rates more pressing still.
Rising yields on government bonds are an indication that such a scenario is seen as likely in the markets, with investors demanding higher interest rates if they are to accept future inflation eating into their returns.
“Should yields march further higher – which is quite possible with the upcoming US inflation and retail sales data to look forward to tomorrow – then there is a possibility the equity markets could be in for another volatile week,” predicted Fawad Razaqzada at Forex.com.
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