Business | Markets
August may be month of volatility
Limited trading can exaggerate impact of data
- Reuters
- Published: 00:00 August 1, 2010
London : Send an email to a fund manager at the moment and the chances are high you will get a bounced reply telling you that he/she is out of the office.
Today marks the start of August, a period that can be — but is by no means always — one of reduced investing and low tolerance for anything other than major market-moving events.
So although the week promises important earnings reports from key Eur-opean banks, a couple of key central bank meetings and one of the biggest US economic data releases —jobs — trading on financial markets may be limited.
In fact, some big investors have already effectively closed up for the holidays.
State Street, the giant US financial services firm that watches over some $19 trillion in institutional investor assets, says that activity among its clients in late July has been way below average.
"Current volumes do seem unusually low. Both FX and equity transactions by institutional investors are in the bottom fifth of their past history," the firm said in response to a Reuters request for data.
Such dips in buying and selling activity can cause volatility on markets because fewer buyers and sellers can mean exaggerated price moves.
That said, there is no guarantee that volume will be light. State Street, for example, said that it generally finds little seasonality in the patterns of institutional investment flows.
Historical numbers from Thomson Reuters Data-stream, meanwhile, paint a mixed picture.
Over the past four years, from 2006-2009, volume on the FTSE 100 index and Germany's DAX has been higher in August than July on two occasions and lower on two.
So while it may be that a lot of market people are taking a break, asset prices can easily become volatile if there is something significant enough to move them in a quiet period.
In the coming week, that could be European banks, many of which are due to report earnings.
Since the generally positive stress test results were released, Europe's financial sector stocks have risen around 5 per cent. Indeed, they are up 22 per cent since hitting a 2010 low on June 8.
A lot of this is because investors reckoned the sector was oversold after the Greek debt crisis. Both ING Investment Management and AXA Investment Managers, for example, have recently lifted their exposure to European banks.
"They were too cheap compared with what we expect they need to write off [after the crisis]," said Franz Wenzel, AXA senior strategist in Paris.
Next test
The next test for this sector will be the results. They are due from HSBC, Standard Chartered, BNP Paribas, Barclays, Societe Generale, Commerzbank, Lloyds Banking Group and RBS.
US banks have mostly reported already, and generally on the positive side. According to Thomson Reuters Proprietary Research, reported and remaining estimated quarterly earnings for the financial sector have risen 35.9 per cent.
It compares with an expectation of 21 per cent at the beginning of July. Some 71 per cent of results in the sector have been better than expected.
Bond prices, in the meantime, are reflecting a climate of low interest rates, generally manageable inflation expectations and worries about the slowing US economy.
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