World Week Ahead: Reprieve, perhaps
By Timothy Moore
Aug. 15 (BusinessDesk) - There’s hope that the worst of the selling has passed after Wall Street advanced for a second day on Friday, but hope doesn’t offer capital appreciation, recoup losses or pay interest.
As a result, investors will rightly remain wary as this week begins, given last week’s volatile action.
The Standard & Poor’s 500 has fallen 11 of the last 15 days, shedding 12.4% in three weeks. Analysts at Bank of America/Merrill Lynch said in a note that U.S. equities were fairly priced for a recession, perhaps too fairly some say.
“This is an exceptional buying opportunity for U.S. equities,” Barry Knapp, the New York-based head of U.S. equity strategy at Barclays Plc, said on a conference call last week. “The incoming data is going to be better, which is going to serve to stabilise the macroeconomic outlook and set the stage for a reversal in equity markets.”
Risk aversion though is high and investors are still stinging from losses nearing US$7 trillion since late July.
That nervousness was shown in the wild swings in prices and the surge in volumes last week in particular. The Dow Jones Industrial Average swung more than 400 points, up or down, for four consecutive days last week, Bloomberg data showed.
In addition, equity volume from August 4 through August 10 was a record for any five-day period, according to data compiled by Bloomberg and Credit Suisse Group AG. The daily average of 15.97 billion shares beat the previous record of 15.94 billion from September 15 through September 19, 2008 - in the wake of Lehman Brothers’ collapse.
The VIX, or the Chicago Board Options Exchange volatility index, ended last week at 36.36. While that’s below the peak it struck in the last two weeks, it’s still about twice as high as it has averaged the last four months.
It’s an “unnerving” time in the markets, Channing Smith, a money manager at Capital Advisors in Tulsa, Oklahoma, told Bloomberg. “The large price swings are indicative of uncertainty in the markets, but we haven’t panicked. Our clients haven’t panicked. We used the market sell-off to go in and buy high-quality stocks.”
The fact that Wall Street managed to rise for a second day on Friday might be a sign that investors are becoming comfortable with current price levels.
“Before moving higher the market needs to do some repair work and needs to build a base, and that's what we're doing right now” Ken Polcari, managing director at ICAP Equities in New York, told Reuters.
The fresh short-selling ban in Europe could take some pressure out of the market. In addition, the pending meeting of French President Nicolas Sarkozy and German Chancellor Angela Merkel on Tuesday in Paris could help check some eurozone concerns. And the adoption of new austerity measures in Italy may offer some additional relief.
Separately, efforts by the Swiss central bank to hold the franc and Japan’s willingness to rein in the yen may help take at least some of the speculative flows out of the market for a few days.
This week’s latest data on the state of the U.S. economy might ease some worries about the outlook for the world’s biggest economy too. There will be consumer price numbers, housing starts, existing home sales, industrial production and a manufacturing snapshot in the form of the Philly Fed Index among others.
The S&P 500's price-to-earnings ratio is at 10.46, according to Thomson Reuters data, considered cheap by historical standards. If the economic data shows that the economy is holding its ground, the light at the end of the tunnel may become a tad brighter again.