The mid-year market correction of 2013 is quite different to the previous three mid-year market corrections. It’s caused by economic strength and stability, rather than the opposite.
In each of 2010, 2011 and 2012 global equities fell in the second quarter because of either growth slowdowns in the US, eurozone crisis flare-ups, growth scares in China and, in 2011, rising oil prices caused by the Arab Spring.
In May 2013, the big US economic releases such as non-farm payrolls, manufacturing surveys, retail sales and small business confidence have all been better than expected, Japan’s economy rebounded in the second quarter and with the Nikkei up 70 per cent Japan looks to have turned the corner, eurozone bond yields are still declining as the risks of a euro break-up recede, and fears of Chinese hard landing are also receding.
This year’s market correction, starting later than usual, was sparked purely by speculation about the end of QE3 – the Federal Reserve’s third, ongoing, round of quantitative easing. After Fed chairman Ben Bernanke’s testimony to Congress last week markets now believe that will happen around the end of this year or early next year, although they had already been coming to that conclusion.
Markets have become addicted to liquidity instead of reality; it could be a painful, volatile, withdrawal, but worth it in the end. As the second of the 12 steps of Alcoholics Anonymous says: “Came to believe that a power greater than ourselves could restore us to sanity” (the “power” being economic growth, not the booze of liquidity).
The other thing to emerge this past week is that the “winner” of the currency wars will be the United States.
It’s a weird war, though. The winner will be the first to surrender, because low interest rates and money printing worked and produced a sustainable economic recovery, so the currency could be allowed to rise once more.
The market now believes the US is closest to that surrender. Thanks to stronger economic data the US dollar index has rallied sharply in May after going sideways for two months, and has now appreciated 6.5 per cent since early February.
So the countries that are trying to get their currencies down through domestic monetary easing – Japan, Europe, Australia, UK, Canada – are getting help from the rising US dollar, as markets anticipate the end of QE.
Alan Kohler will be hosting two Ashes lunches with Gideon Haigh and Stephen Fay (former editor of Wisden and author of books about The Bank of England and the collapse of Barings) on June 25 in Sydney and June 26 in Melbourne. To book a table click here.