Friday 22 January 2016

Davos helps yield confidence for ailing markets

Every January the small town of Davos in Switzerland becomes the focus of much of the attention as heads of state, business leaders and even celebrities pushing an agenda come out in their droves to gather around to discuss the state of the world with this year being no exception. Judging by the last 6 months of uncertainty hanging around the future of Chinese economic growth and the volatility it has reverberated throughout the entire global financial system, this year was going to be much more challenging for delegates to simply brush worries aside and campaign lesser priority issues.

As much as things do turn into a political promenade for leaders to rub shoulders and a networking opportunity for the rich and famous, the real business of the day came down to what the various role players in charge of stimulating their respective economies had to say about the outlook and how they plan on dealing with the problems.

Chinese vice president Li Yuanchao went on the charm offensive by reiterating the point that China remains in the driving seat of world economic growth and has now entered a new stage he called "the new normal". He added that the government intended to continue supporting the equity markets to ensure stability is once again secured and that there was no further devaluation foreseen in the short term providing some relief for the time being.

The boost has shone the spotlight on what Chinese authorities can do to ensure confidence in their financial system however it doesn't take away the problems that remain. I don't at all think that China should be underestimated in terms of their power to shift trends, we've seen that emerge over the past few years but this doesn't necessarily mean that we in the clear when it comes to financial stability.

For a government to actively pursue the objective of supporting its own market does showcase a financial system under strain and that will still remain the key to investing and trading in the year 2016.

Draghi tries to right the wrongs after surprising the market

Having spurned a surprise on the market with lower than expected stimulus measures to be implemented in the EU that sent markets tumbling in early December, the tone of ECB president Mario Draghi has changed somewhat to a more dovish one where he said a move to increase stimulus measures could take place as soon as March but again reinforcing the idea that interest rates will remain low for a protracted period of time.

The dip in oil prices has sent inflation hovering above the flat line as the economic trading bloc tries in vain to kickstart an economy that lacks the political desire to change its socialist policies that have destroyed value creation by government interposing itself between jobs and living off benefits which is clearly unsustainable in the long run.

Markets jumped at these suggestions as a positive move which they were looking for in December but never received and I think if the Fed comes through with a dovish statement in the weeks to come it could trigger the start of bullish sentiment coming into the market.

With less than a day left before the curtain falls on the pomp and ceremony it clear to see that these two events have reignited market interest apart from the two previous days of dialogue showing that when the market is concentrated on a theme or topic that takes centre stage it is very difficult to deviate that attention away unless the impact is of such profound importance that it demands attention.

The moral of the story? Don't be bogged down by the smokescreens, focus on what matters the most.
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