In recent days, several of America’s largest investment groups, such as Fidelity and Northern Trust, have been discreetly reviewing their staff holiday plans. The reason? Right now, with the summer heat rising, the mood in the financial markets seems relatively calm.
But the issue worrying some investment firms is what might be called the "summer curse”; precisely because trading volumes tend to be so thin in the summer months, and senior hands are away, markets can go completely haywire if something does go wrong.
And this "summer curse” is not a theoretical issue. Just think of 1998 (the Russian crisis and Long-Term Capital Management hedge fund implosion); 2007 (the mortgage securities and money market freeze); 2008 (the Fannie Mae "jolt”, which led to the Lehman Brothers disaster); or, for that matter, think back to how markets were rocked last year by the eurozone crisis and the US debt ceiling dramas.
So could this summer be sticky, once again? Personally, I have a nasty feeling that it might, given that the markets are seeing the collision of at least five unwelcome issues:
This week markets have rallied amid relief over the latest eurozone rescue plan. But, as Larry Summers, the former US Treasury secretary, told the Aspen Ideas festival last weekend, the latest plan has only bought the eurozone "a bit more time” to sort out the longer-term structural woes – and it remains crucially unclear, as ever, whether it can do this. Meanwhile, funding costs for Italy and Spain are unsustainably high, and there is mounting evidence of economic pain (witness the record high unemployment data this week). Investors could well panic again if there are more signs of banking stress or fresh evidence of political discord. Watch out, for example, for the run up to September’s Dutch elections; this could highlight rising levels of bailout fatigue and political extremism – even in the supposedly "sensible” Netherlands.
US politics and debt
Nobody expects the presidential candidates themselves to deliver many fireworks this summer; Mitt Romney and Barack Obama are both striving to present an ultra-reassuring (aka boring) face. But the political waters around them could get choppy; in particular investors are getting nervous about the debt rhetoric again, given that there is still no deal in place to stop America falling off a "fiscal cliff” later this year (i.e. hitting a debt ceiling and imposing radical austerity measures). Watch out for more posturing on this, and a looming report from Dick Ravitch and Paul Volcker, two respected financial grandees, on America’s state finances, which could be shocking.
Investors have been bracing themselves for months for sub 8 per cent gross domestic product growth in China. But it is crucially unclear whether they have understood all the knock-on implications of this. For while there is a great deal of international market activity and investor optimism riding on the Chinese economy today, the granular on-the-ground details of how it operates in 2012 remain almost as mysterious to western investors as the US mortgage sector was in 2006.
The Libor scandal
This has already caused turmoil at Barclays (and the Bank of England). However, other banks may soon be forced into costly settlements, and management changes, or even face criminal indictments, if there is any evidence of collusion in American markets. At best, this threatens to further undercut popular confidence in finance; at worst it could reduce liquidity and credibility – just when it is really needed.
When Britain decided to stage the 2012 Olympics, pundits fretted about whether London’s creaking transport infrastructure would cope. What nobody asked, however, was the potential risk of partly shutting down the City, which is the world’s largest foreign exchange trading centre. The banks say they have made contingency plans to cope with the fact that many traders will be unable to get to work, but this week the Bank of England announced it would suspend gilt auctions during the summer because of a potential loss of activity. That is not encouraging; see above point.
Of course, if European leaders keep slapping fresh Band-Aids onto the oozing eurozone sores, if America’s politicians offer calming remarks on the US debt, and the Chinese government keeps stimulating its economy, then nobody need worry about those last two problems; traders and policy makers alike can all retire to their beaches, villas or boats, to watch those Olympic Games. But that relies on a number of "ifs”; and that is without even thinking about the perennial risks of the Middle East. Don’t say you haven’t been warned; better check that BlackBerry (or iPhone) is working well on the beach.
Copyright The Financial Times Limited 2011.