Don’t panic (yet)
Global equities have taken fright. The U.S. S&P 500 benchmark fell 1.4 percent on Aug. 15, its biggest drop for almost two months. The VIX, a measure of the S&P’s implied volatility over the next 30 days, leapt 13 percent. And China’s Shanghai Composite Index spiked 5 percent on the morning of Aug. 16, before snapping back.
The good news is that a solid technical reason lies behind the see-sawing: the August lull when most traders head off to the beach means lesser volume, and hence more volatility. Since 2008, fears of a global economic collapse and the euro zone crisis have meant this traditional month-long hiatus hasn’t tended to happen. Now, with fewer near-term concerns, weekly trading volumes of the Dow Jones industrial average fell in the week ending Aug. 9 to 425 million, lower than at any time barring public holidays since the crisis began in 2008, according to Thomson Reuters data. A similar pattern holds in Europe.
The bad news is that market gyrations also reflect real concerns about the economy. Consumer spending looks weak in the United States: Wal-Mart’s poor quarterly results, in which it revised year-end guidance, echoed those of fellow retailer Macy’s earlier in the week. Meanwhile, analysts at Morgan Stanley reckon credit markets are pricing in a one-in-four chance of spreads on European corporate five-year credit default swaps returning to levels last seen during the sovereign debt crisis by December.
True, many countries in the euro zone have limped out of recession with their first quarter of growth for a year and a half. But others remain troubled. A burst housing bubble meant the Dutch economy shrank for a fourth straight quarter.
Until normal trading volumes resume in September, it will be hard for investors to assess the extent to which equities are pricing in fundamentals. One complicating factor is that global equities trading volumes have looked anaemic for some time anyway. And Dow volumes did pick up slightly to 534 million in the week ending Aug. 16.
Still, traders will welcome the return of the August lull. It at least provides one legitimate reason not to fret overly about the economy’s weak spots. That will make it a little easier for them to enjoy the rest of their holiday.