This has been a particularly unpredictable week for global stock markets, with renewed levels of volatility gripping investors. The FTSE 100, for example, dipped from a Tuesday peak of just over 5900 points to a Wednesday trough of around 5640 points before heading all the way back up by the end of the week.
So what caused this volatility? The initial weakness early in the week was once more down to falling commodity prices and corresponding concerns about a China-led global slowdown. Brent crude oil, for example, slumped below $30 a barrel amid comments from the International Energy Agency that the oil market could “drown in oversupply”. The subsequent market surge was driven by a rebounding oil price and hopes that central banks would provided extra stimulus. Specifically, European Central Bank (ECB) president Mario Draghi signalled that his central bank was prepared to cut rates and expand its quantitative easing programme in an attempt to boost the Eurozone economy.
Our own view is that the recent stock market falls seem to have been driven by a loss of financial confidence rather than weakening economic conditions. This gives us some assurance that further weakness is unlikely as the most painful bear markets are usually accompanied by a recession. Clearly there is a danger that the falls in equity markets could lead to further dip in sentiment, resulting in a self-fulfilling fall in activity and then recession. However, central banks are acutely aware of this and will take action to provide more support if necessary. Global growth will continue in the long term and, whilst stock market lows are hard to time, history has always shown large drawdowns to be a buying opportunity in hindsight.
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