The equity market experienced a significant drop in stock prices in July and August, but both investors and the market appear to have promptly recovered from it. What were the factors behind the major plummet and rapid recovery?
The equity market flipped back and forth in July and August. Now both investors and the market appear to have promptly recovered from the fall in stock prices seen in July–August. Investors’ risk appetite appears to have returned, and the equity market has pulled stock prices back up.
Earlier, interest rates also took a downturn on the fixed income market, as the market anticipated several interest rate cuts by the central banks until the end of this year. Market rates have now resumed a moderate increase, however, and corporate bond spreads have shrunk while price fluctuations on the markets have simultaneously become more moderate.
The markets have recovered relatively quickly from the equity market’s early August decline. This supports the notion that the fall in stocks was not due to a clear change in the economic and market outlook.
Instead, the stock movement appears to be largely an issue of a change in large positions. These positions have included, for instance, the strong weight on American tech companies and so-called carry positions, in which USD-denominated investments are financed with a yen-denominated loan. As the yen appreciated in July, the situation for investments in carry positions became challenging, prompting investors to ditch their positions.
The earnings season has been more positive than expected on both sides of the Atlantic. Index-level earnings growth in the USA has been around 8.5 per cent, and average net sales growth 5 per cent.
With respect to the USA, however, a worrying aspect is that most earnings growth is from tech, financing and healthcare companies. At the same time, earnings growth among raw materials companies has been negative.
In Europe, earnings have continued to shrink, albeit less than expected. Earnings have shrunk by an average of around 14 per cent, while net sales has grown 2 per cent on average.
Although the results from Europe are slightly better than expected, the figures paint a misleading picture of the performance of some sectors, as individual companies significantly affect the figures of their entire industry. In the financial sector, for example, the weak figures of the Swiss bank UBS pushes the entire sector’s figures well into negative territory. In telecommunication services, the strong earnings of Telia and Telenor considerably prop up the entire sector’s figures.
Similar to the situation in the USA, the earnings of raw materials companies have been shrinking in Europe for some time now. Also in Europe, companies in the sizable automobile sector have reported weak figures.
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