In the last couple months, markets have moved much more overnight than during U.S. hours. While volatility in our markets has been higher than normal, it has been nothing compared to what most other global equity markets have experienced.
Last night was no exception. Reasons given for overnight equity weakness range from minister defections in Portugal which threatens their government, crude oil’s rise due to concerns about the Suez Canal in Egypt, and Chinese weakness because, well, China is weak. Here is a list of the notable markets that were or are down more than 1% overnight:
- Hong Kong down 2.5%
- Taiwan down 1.3%
- South Korea down 1.6%
- Australia down 1.9%
- India down 1.5%
- Indonesia down 3.2%
- All of Europe down more than 1%
Meanwhile, Brazil was down 4.2% yesterday, and is down more than 25% for the year.
U.S. markets have shrugged off much of this weakness, and some view that as a sign of strength. If the problems weren’t so widespread, and were just confined to one area of the globe, I would be more accepting of that argument. But global markets are not down because of Egypt. Not down because of Brazil. Not down because of Turkey. Not down because of China. Not down because of Portugal. There is no single cause. The signal that weakness sends for future global growth is likely the market’s biggest concern, and most importantly, the market’s future expectations are much higher today than they’ve been in 2010, 2011, or 2012.
Price determines risk. While it might be easy to dismiss all the negative headlines as more cases of the Boy who cried Wolf, the vulnerability of the market with the S&P 500 at 1600 rather than 1350 (where it was a year ago) is higher, especially since earnings have hardly grown.
In short, the reaction to the headlines is often a function of the positioning in the market. Negative European headlines were met with ample buying last summer, as investors were clearly content to buy stocks at those valuations even with the inherent risks. Current long positioning in the U.S. market leaves it more vulnerable to selling swoons from headline risk, no matter the long-term impact of the headlines.
But if I did indulge the headline-writers, what would concern me most? European banks. As Dan highlighted yesterday, European banks are the focal point of systemic risk concerns globally. SX7E, the European banking index, is trading at its lowest level in 10 months. Something rotten in DeutscheMark indeed.