Volatility in global markets expected

Domestic data out this week will pale into insignificance compared with developments offshore, particularly those in global equity markets, BNZ head of research Stephen Toplis says.

Previewing the week ahead, Mr Toplis urged investors to fasten their seat belts as they could be in for a bumpy ride.

The market correction last week was worrisome.

‘‘We have been expressing for some time now our concern just about every asset looks overpriced and a correction was long overdue.’’

Whether it was a correction or not, last week was a reminder asset prices of all descriptions had been running strong for a long time and, accompanying that strength, volatility had been low, he said.

The root of the asset strength had been major global central banks leaving the world awash with cash. Not only had there been lots of it but its cost (interest rates) had been uncharacteristically low for an extended period.

Lots of cheap money had pushed up equity prices, house prices and such things as antiques, stamp and art collection prices.

Central banks were now reversing the process. The pace of quantitative easing was slowing and, in the United States, Canada and the United Kingdom, interest rates were rising, Mr Toplis said.

‘‘It should come as no surprise assets should respond to this. And when they do, there is really nowhere to hide. Correlated price gains on the way up means correlated price falls on the way down.’’

Just how far the process went was open to debate but the signs were increasing a significant correction might be sooner than later, he said.

At this stage, the good news was, despite all the hype, global equity markets had only fallen 8%, were only back to where they were in mid-October 2017 and were still up nearly 10% on the corresponding time last year.

The bad news was if it was the start of a correction, there could be a long way go go, Mr Toplis said.

The Crown financial accounts out this morning were expected to provide a continuation of recent upside surprises, allowing the Government some room for its expansionary fiscal plans.

Tomorrow, it was the January Food Price Index release, usually a big month for food price inflation because of seasonal increases in fresh fruit and vegetable prices.

The Reserve Bank inflation expectations data was also due out tomorrow but Mr Toplis did not expect the one- or two-year figures to deviate sufficiently from 2% to cause any concern.


 

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