The Waiting Game

It seems markets are encountering one of the biggest waves of volatility since 2011. Investors trading the VIX volatility index are surely the current winners as uncertainty and weak fundamentals continue to spark sell-offs into 2016 in favour of safe-haven assets.

The ECB’s recent press conference confirmed doubts that the Eurozone’s fundamentals remained weak and that further stimulus measures are to be expected in the coming year. There was no doubt investors expected such an announcement as the Euro failed to lose much ground vs the Dollar as per previous announcements undertaken in 2015. Mario Draghi has since been busy convincing investors of the viability of the stimulus program for a Eurozone recovery. So far, it seems to have fallen on deaf ears as confidence in global markets has continued to weaken. In fact, yesterday marked the first outflow of funds from European equity Exchange Traded Funds (ETFs) since 2014, confirming that investors this time around are doubting the policy measures of the ECB in rejuvenating growth, which is enticing further volatility on global markets.

The US showed contrasting signs yesterday as the Consumer Confidence Index data came in above expectations and 1.87% above that of the previous month. Whilst good news for the local currency, the same cannot be said with regards to emerging markets. Analysts continue to come out in numbers warning of a drag on global growth out of this sector for the coming year. The reason? Many emerging market companies have borrowed in USD, and an appreciating dollar is going to do little good to lowering already high default rates and boosting emerging markets demand.

The appreciating dollar may not be the best of scenarios for a recovering US economy amidst a global slowdown. As 2016 rolls by, it is imperative that political motives prior to general elections in the US later this year don’t undermine the objectives of the greater economy in favour of short-term political gains. A fall back into recession in the US economy will almost undoubtedly trigger a bear market worldwide.

The same could be said in the Eurozone. Yesterday saw mass strikes in France as taxi drivers, air traffic controllers, civil servants and teachers demanded more purchasing power, job creation and an end to disruptive competition to traditional industries. This highlights the need of imperative fiscal reforms to be undertaken. However, with Hollande’s socialist government quickly losing popularity, fiscal measures undertaken should serve the better good of the Eurozone recovery and not the interests of the party ahead of general elections in mid-2017.

The economic outlook isn’t one to write home about. With future political drags foreseeable and the current lack of confidence in monetary stimulus measures, investors will be hoping a silver lining presents itself in the coming months. This silver lining may well take the form of an agreement between OPEC and non-OPEC oil producers to reduce global supply and bring stability and confidence back to financial markets. Though at this point, we just wait and see.