VOLATILITY IS INCREASING

Markets have been whipsawed around by both positive and negative news, with some significant events highlighting the need for caution and also diversification.  For example, some of the issues that have moved markets include:

·         US 30 year Treasury yields hitting a record low (US borrowing costs are at record lows);

·         European government bond yields hitting record lows, and even turning negative for some durations (savers are paying banks to hold their money);

·         Chinese GDP growth hitting a 24 year low (China is slowing down, double digit growth rates are gone);

·         European equities hitting a 7 year high (shares are rising on the back of stimulus measures);

·         The Euro currency falling to an 11 year low against the US Dollar (money printing is devaluing currencies);

·         Commodities falling sharply, with oil down more than 50% since October (good for consumers, but not for exporters);

·         A surprise move by the Bank of Canada to cut interest rates by 0.25% (falling commodity prices are taking their toll);

·         A shock move by the Swiss National Bank to unpeg its currency from the Euro (currency soars and equities tank);

·         The European Central Bank announcing a massive stimulus package to print €60 billion per month (Europe is bordering recession, can stimulus turn it around?);

·         Anti-austerity party, Syriza, winning Greece’s election (this puts debt default concerns back on the agenda);

·         Standard and Poor's downgrading Russia’s government bond rating to below investment grade (Russia’s credit now considered ‘junk’).

 Some of these events have come as a complete surprise to markets.  Of particular note was the Swiss National Bank’s decision to unpeg its currency from the Euro, only two days after confirming to the market that it would maintain the currency peg.  This decision sent the Swiss Franc soaring 30% against the Euro and sent the Swiss share market down more than 10%.  These large scale and quick moves have negatively impacted some investors, with the world’s third largest retail foreign exchange broker requiring a bailout to stay afloat.

 

Despite these issues and rising volatility, share markets have held up relatively well, with most trading positively for the month to date.  However, we would caution investors from becoming too complacent.  The market is providing some warning signals, and we recommend that investors remain focused on diversification and risk management to mitigate the possibility of a negative ‘event’ impacting portfolio returns.