Since the beginning of the credit crunch in 2008, and throughout the on-going financial crisis to date, for whatever reason it has been during the summer months that the markets have experienced the most tumultuous of times.
The riots in Greece, chatter around a Catalonian secession, downgrades of the US credit rating, to name just three, all came about during the summer. Nonetheless, at the beginning of this year it looked like we might not get a repeat performance this time around, and that a quiet June, July and August could lie ahead.
However, recent developments suggest that this will not be the case after all - far from it in fact. I believe that the markets will be governed by three main strands of fear over the next few months, all of which have become apparent in the past week or so.
The most obvious is the fear that the Federal Reserve (Fed) will withdraw stimulus - or 'taper' away its asset purchases - too quickly and that US and world growth will be adversely affected. The rises in bond yields that have accompanied the Fed's desire to scale back its QE program have seen mortgage rates rise dramatically and put the recovery in the US housing market in jeopardy. Combine this with likely losses in the equity markets, and you can easily see business and consumer confidence suffering as a result.
We are great fans of acronyms in financial markets. Readers may have heard me talk about 'RORO' in the past - the dynamic that the market finds itself either 'Risk-On' (happy to invest in riskier assets on the back of increasing global economic confidence) or 'Risk-Off' (safer assets are desirable as confidence slips). This mantra used to govern the markets, but now it doesn't. The new defining acronym is 'POPO' - Path On/Path Off.
The 'path' here is not one to enlightenment, but is instead a path where the Fed currently envisages the US economy coming down in order to meet its timeline for the reduction of asset purchases. This was clearly laid out by Fed Chair Ben Bernanke on Wednesday evening. Data that supports the jobs market indicates solid growth or points to an improving inflation outlook will be viewed as "Path On" and markets will behave like they did on Thursday with equities, bonds, commodities and high yielding currencies lower and the dollar benefiting greatly. Likewise, "Path-Off" should see these losses retraced as investors bet that the world is not ready for a Fed to step away from the printing presses just yet.
The 2nd strand is China. Many observers have long been fearful of the propensity for China to spoil the party in 2013, following a poor end to 2012 in growth terms. The latest issue is a new 'credit crunch' within bank funding markets following concerns over liquidity. This would be difficult in an economy going great guns. However, China finds itself with the slowest manufacturing growth in 9 months and GDP bouncing along the bottom of expectations.
The key will now be who wins out? Banks wanting liquidity and stimulus, or a government which is prepared to take air out of the economy to bring about stability in the future.
The final strand is Europe. On Friday, Greece's governing coalition lost a member party after negotiations around the sacking of more public employees. This leaves the government with a wafer-thin three seat advantage.
Needless to say, Greece is not in a position to comfortably sustain any more political turmoil -especially given last week's IMF notification of a €3bn funding cap that could jeopardise the next payment of troika aid. Yields on European periphery debt have risen alongside all other bonds and will continue to do so.
So, as you can see, it looks like the summer of 2013 is hotting up to be one of widespread activity and tension in the world's markets. In unpredictable economic times it seems that a volatile summer period is at least one thing you can rely on.Suggest a correction