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Overnight markets: outlook weak
Asian markets opened down today, following US and European markets down, with the level of the falls being similar. The Nikkei is down 1.45% so far today and the Hang Seng 1.46%. The Straits Times Index and the BSE are a bit healthier, falling on 0.5% and 0.89% respectively. Shanghai is the worst performing major Asian market, down 2.2%.
The sharp drops across the world cannot easily be attributed to any one factor. While there have been issues in various markets, the is no news sufficient to account for it. It appears to me the result of a change of mood, as investors consider whether the recent rally can be justified.
The rally is no increasingly being explained, not as a reaction to the prospects of economic recovery, but as driven by money injected into the economy by governments printing money (“quantitative easing” to those who want it to sound better). There is a strong case that markets are over-valued on fundamentals. Jeremy Grantham’s quarterly letter is currently in the news, but it just the latest in a series. Andrew Smither’s made a similar argument based on Tobins Q.
It is difficult to imagine that the market will be unaffected when governments tighten economic policy, as they will have to sooner or later. With investors now becoming convinced by the case for the market being heavily over-valued, it looks likely that it will be the trigger for a decline.
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