Investor sentiment causes wild swings in financial markets
After a turbulent week, a strong equity market rally late on Friday erased much of the losses experienced from Monday to Thursday. Market sentiment has persisted to create high volatility in markets. Worries, this time, were centred on the health of the global banking system. Persistent low interest rates and bad debts from oil companies are feared to be eroding profits of major global banks and harming the overall health of the financial system. However, while these investment risk factors may well suppress the ability of banks to generate profits, senior global financial figures have come out with words of support for the health of the banking system and that we are not having a repeat of the 2008/9 financial crisis. This resulted in the hardest hit banks rebounding strongly on Friday, with Deutsche Bank’s shares gaining over 12% in one day.
Once again, behind much of the concern is the low oil price. A strong rally in the oil price would result in much of the negative sentiment in equity markets to ease. Higher oil prices would stoke inflation (deflation is currently a major concern in many countries) and improve credit the worthiness and equity values of oil companies. However, with the current market looking at continuing oversupply for some time, there will need to be a significant catalyst for a sustainable rally in prices. There have been hints of this over the last several weeks, with increasing numbers of OPEC and non-OPEC countries calling for a co-ordinated supply cut. As most producer countries are now running deep budget deficits, it is more a matter of when rather than if there will be an agreement to bolster prices. Such an agreement would provide a significant and rapid positive shock for equity markets which may reverse the current negative sentiment.
On Tuesday the latest CPI inflation data for the UK will be released, as well as a raft of economic data from the US on Wednesday, including producer prices, PPI/ CPI inflation housing starts and building permits.
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