This Week's Focus: Correction or crisis in the Stock Markets?

This Week's Focus: Correction or crisis in the Stock Markets?


The beginning of 2016 in the equity markets has been the worst in 20 years. The Eurostoxx 50 index accumulated a -9.84% to close on 21 January. Surprisingly, few media outlets have echoed this event as it ought to be news.

The most likely reason is that there has been no panic trading day since the fall has been accumulating at a fairly recurrent rate with oscillations close to two percentage points per day, with some days of ascent.

Arguments for a technical correction

If we compare with our model of behavior of markets and we see that the cumulative decline in the first 20 days, exceeds 95% of the monthly returns of the past 20 years, so you would qualify it as extraordinary. It is true that there are still a few days to the end of the month and after the message of the ECB, the market could initiate a bounce that makes the monthly closing and not as accused happens to be in our area normally.

However, there is a black day appointed, but a monotonous regular period falls. This is evident in the behavior of rates implied volatility known as indicators of investor fear. In moments of panic they tend rates rebound sharply, indicating a strong expected volatility in the immediate future.

In 2016, by now, volatility measured by these indices have increased on average from the previous year, but has not reached "peak" as if it happened in August 2015. We believe that to panic, corresponding with a market capitulation , we should see the VIX above 40%. For now, he has not.

This continues, is likely to gain weight correction argument and that we will see a rebound in the index if no external factor that triggers a panic selling and a financial or economic and financial crisis.

Arguments for a crisis

Possible factors that can act as a trigger are varied, but they share a geopolitical origin:

  • The collapse in oil prices: a favorable effect on developed economies (cheaper oil should encourage consumption and corporate profits, except the oil) may be tarnished by lower consumption and investment in emerging oil producers. The opposite effect, ie, an unexpected rise in oil prices, can act as a depressant on the economy.
  • Tensions in the Middle East: the role of Iran, as opposed to Saudi Arabia, adds risks in a hot area and may have adverse effects on oil prices.
  • Slowdown in China: with an obvious overcapacity and the need to gently steer the change in the economic model of the second world power, involve a risk of exporting deflation to the world, in addition to a currency war not to lose competitiveness.
  • Hundredth euro crisis: the pressure added by the management of the avalanche of refugees in Europe, the reintroduction of border controls, high public debt and the slow effect of monetary policies, plus calendar of national elections, can create situations of discontent Euro in a construction zone. Monetary policy can not yet be taken fiscal and governance measures do not appear in the priorities of the European agenda.
  • The monetary cycle in the US: the Fed is the first central bank in testing the output of quantitative easing. Market expectations are far from being communicated by their leaders, so changes in expectations with the unexpected changes in asset prices, may increase the volatility of financial markets and cause bulging falls.
  • High-frequency Trading: increasing the volume of money managed under algorithmic systems with multiple diversified strategies involve greater volatility in the underlying assets when suddenly changing correlations. He attributed a large role in both Falls last summer and current.

In any case, be sure everything is in only a temporary shock and in a few weeks is an anecdote. It is not uncommon to fall 10% will happen rebounds of equal or greater magnitude. What sobering it is that this disaster happened last in 2008 and many remember how it ended.