Tags: investors | 2018 | surprise | market

This Year Promises to Be Volatile and a Steady Surprise for Investors

This Year Promises to Be Volatile and a Steady Surprise for Investors
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By    |   Monday, 12 February 2018 07:19 AM

As for today, we don’t have important economic data to look at, politics might get some attention with U.S. Vice President Pence suggesting that the United States would be willing to talk to North Korea over the country’s nuclear and missile programs.

Vice President Mike Pence has said that the United States and South Korea had agreed on terms for further diplomatic engagement with North Korea, first with Seoul and then possibly leading to direct talks with Washington without pre-conditions.

The Korean issue is not something that financial markets have been especially focused on as financial markets rarely ever contemplate extreme negative political and geopolitical risks.

Nonetheless, the fact that this has been publicly stated and not just in a tweet may give the policy some credibility.Nevertheless, 2018 promises to be a volatile year that could and probably will surprise many.

Over in China, the U.S. embassy has been the target of social media protests over the drop in the Chinese equity market last week. The attacks are suggesting that the head of the Chinese regulator is somehow in league with the U.S. government.

The U.S. Embassy Sina Weibo account received more than 10,000 negative comments about the Chinese stock market’s substantial fall in prices.

An interesting comment reads: “Mr. Ambassador, is Liu Shiyu your undercover agent in the Chinese government? This guy succeeded in pushing hundreds of millions of Chinese investors to the opposite side of the Communist Party and government.”

By the way, the China Securities Regulatory Commission had prevented people from remarking on its own Weibo account last week. Liu Shiyu, took over as chairman of the securities regulator in February 2016 in the wake of a $5 trillion rout and drove volatility to the lowest in decades.

In some way, it’s understandable that many Chinese didn’t understand what went on in their market with prices falling and volatility spiking.

Now, it is completely unlikely that the U.S. government has deliberately sought to cause Chinese, but also their own equity prices to fall, given President Trump’s history of confusing equity prices with political and economic success.

Anyway, investors could learn from all this as the whole story reminds us all of the facts that the efficient market hypothesis and the assumption of rational decision making in economies are open to being challenged by reality.

On Sunday, European Central Bank’s (ECB) rate-setter and Governor of the Austrian Central bank Ewald Nowotny said on the Austrian television: “The recent drop in equities is a normalization, a reasonable wake-up signal to show that stock markets can’t just keep rising all the time. Behind the drop there is an expectation in markets that central banks will increasingly raise interest rates, and there are certain good reasons for that. The U.S. is expanding. However, one has to say that the task of central banks isn’t to satisfy markets but to ensure overall economic stability. So, if necessary, interest rates will have to rise, and markets will adapt to that (Take care, that could and probably will turn out to be painful for many investors the day it happens!).”

Nowotny believes that the ECB's asset purchase program should be stopped now but a decision on the program's fate will only be reached by September.

Besides all that it’s a fact that markets as well as investors struggle with the idea of central bank monetary policy tightening more than a little. This may be because economic data tends to be revised often quite significantly to show stronger rates of activity than were initially reported.

Financial markets never pay attention to the revisions.

As a result, economists, and good central banks are run by economists, have a more positive view of the world than financial markets tend to price in. 

Nevertheless, 2018 promises to be a volatile year that could and probably will surprise many.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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Investors could learn from all this as the whole story reminds us all of the facts that the efficient market hypothesis and the assumption of rational decision making in economies are open to being challenged by reality.
investors, 2018, surprise, market
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2018-19-12
Monday, 12 February 2018 07:19 AM
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