Market volatility and fixed income

Mark Holman, CEO TwentyFour Asset Managment, gives the fixed income viewpoint on August market falls

August 2015

Global growth concerns have led commodities sharply lower which, in turn, have led emerging markets sharply lower, which now has fed back into developed market stock indices with the Dow Jones (US stock market index) closing down 358 points on Thursday and by another 530 points on Friday. These two moves combined make the 2-day move in the Dow, in points terms, already bigger than what we saw in 2008 following the demise of Lehman Bros. Naturally, in percentage terms it is smaller, but when we look at Monday’s Dow opening, which started with another decline of over 1000 points, this qualifies as a very big move on all metrics!

Sitting here, discussing with the team, we felt very differently in 2008 and definitely felt even worse during the August/September period in 2011, when markets were pricing in an unravelling of the Euro and potential imminent default of Italy. At the time, the debt of many sensible companies was trading over 10%, and it felt like an enormous opportunity, albeit a risky one. Fundamentals feel significantly better today, and yields on bonds are holding up much better than prices on stocks. So what is happening?

This current crisis (if we can call it that) is not so close to home, so maybe we are not feeling the effects as much. However, are these moves that we are seeing consistent with an economy that is on the brink of pushing through an interest rate hike? Absolutely not, unless you think that the likely cause of the drop is the potential September rate hike, which is becoming less and less likely from a market stand point.
So something is wrong. Is it the Federal Reserve’s interpretation of the economy, or is the market overreacting due to the lower liquidity summer markets? We think it is probably a combination of both. Having said that, sharp moves such as these can very quickly dent confidence at both the corporate and consumer level, which can then very quickly feed into the real economy. Central banks will be very wary of these types of moves should they persist for any length of time.

Consequently it will be very interesting to hear what is being said at Jackson Hole at the annual economic symposium commencing on Thursday. Surely the September hike is off the cards?

For now though the market does not feel good, but the magnitude of the moves do not seem justified by fundamentals and, consequently, it would not take much to see a sharp rebound. The overspill into fixed income has occurred with sharp rallies in the risk-free rates markets and higher yields in certain areas, particularly those deemed to have links to emerging markets or commodities, where there are higher risks.