Heavy selling in equity markets all week was met with a small modicum of respite on Friday, when investors seemed ready to pause while the rest of the world caught up.
In many ways it’s not really surprising that the sell off came – equity markets have been fully valued for some time, American indices have been hitting new highs with so much regularity that investors have become used to it, while at the same time bond yields are rising alongside interest rates. So, all of a sudden, after more than a decade of soft money, investors have more than one asset class to choose from, and the switch away from equities is a perfectly rational response to the new prevailing economic environment.
The world has now well and truly moved on from the global financial crisis, and the next stage in the economic cycle is underway.
Which brings us to an interesting question. If the big sell-off was inevitable, why did it happen this week and not last week or in three weeks’ time?
There’ll never be a single straight answer to that question, but the most plausible explanation seems to be that a tipping point was reached with the announcement of the latest round of US jobs numbers, which seem to indicate full employment, or as full as it’s ever going to get. That in turn is likely to lead to inflationary pressures which, compounded with Donald Trump’s ongoing trade war with China, a general weakening of emerging market economies in the face of the strong US dollar, and the new alternative investment destinations that are opening up, triggered a bout of selling that then snowballed.
After all, there are several pundits who have been calling the top for some time, and once an idea like that becomes general, the momentum is hard to stop.
Where we go from here though is open to question. Growth in the US economy is likely to slow over the coming year, but not by much. The Fed is likely to continue to raise rates, even though Mr Trump is against it. And if Mr Trump does manage to bring China to the negotiating table to sign a comprehensive trade deal, then there are still significant grounds for optimism.
That sort of thinking may be why the sell-off stalled on Friday. Or it may be that bears are simply pausing for breath and working out how low they want to go at the moment.
Either way, the effect on metals and mining markets has been interesting. The risk-off attitude has led money back into gold, and the price is now pushing up towards US$1,200, a level it hasn’t challenged for several months. The trend of the gold price is still definitely down, given the Fed’s plans to boost the dollar’s yield over the coming months, but the flight to safety in this round of selling has been marked.
In London, two of the best performers of the week were Fresnillo (LON:FRES) and Randgold (LON:RRS), as investors bought heavily into precious metals producers. And in North America, gold specialists like Goldcorp (TSE:G) were also better off.
If the flight to safety is short-lived, shares in all these companies are likely to continue on their longer-term downward trajectories, albeit that the Randgold picture will be complicated by the ongoing merger situation.
But if equity bears get the bit between their teeth, we could witness the interesting scenario of a falling stockmarket at a time of wider economic prosperity. Such a topsy turvy dynamic would be a fitting end to a long period of extremely unorthodox economic policy.