The last two weeks have featured spectacular volatility
compared to what financial markets experienced in the previous two years. Compared to what Wall Street witnessed during the credit crisis, recent volatility has not been so extreme. Leading up to the crisis, many bankers and investors enjoyed tremendous paydays as American equities experienced a terrific bull market, as seen in the late 1990s during the Internet boom, and since 2009 as the S&P 500 kissed 2000 points. The latest pullback, in anticipation of rising interest rates, stronger dollar, and commodities selloff, has many concerned over the possibility of an upcoming recession. This fear was bolstered by a weak retail sales economic indicator, implying a reduction in domestic demand, the driving force of the heralded American economy.
Abroad, the worries are even more extreme. England stands
with relative health as they nearly avoided the Scots from leaving Britain. The European Union and Central Bank have unleashed a quantitative easing program to stimulate their recessionary economy, dependent on the feeble health of Angela Merkel’s Germany, whose ten year note is yielding an a measly 0.87%. Anemic yields are an even greater problem in Japan, where despite bullish equities in the last couple of years, Abenomics has pushed the yield on their ten year note to 0.46%. Japan suffers from structural issues such as age demographics that are depicting a birth rate below replacement levels. Somehow, the Japanese need to further lower interest rates to stimulate a demand-driven economy while managing inflation.
Investors across the globe need somewhere safe to park their cash in such times. Historically, oil and gold have proved relatively sticky havens for assets, however both have sold off to 52 week lows. As Chinese growth decelerates and Europe struggles in the face of recession, investors are seeking safety in the United States. The US dollar has done well since the Federal Reserve has implied dovish current policy will be soon replaced by hawkish dots, and momentum players are further bidding up the dollar. Furthermore, money managers looked to US treasuries due to their favorable yields compared to mature economies such as the yields available in gilts, bunds, and yen bonds, thereby tightening yields to such an extent that the ten year treasury dipped below 2%. Such troubling times may call for the Fed to delay hiking rates until late 2015 as opposed to expectations suggesting summer of 2015.