Markets – Frost Breaks Rocks

Frosty Rocks

The hardest and most obdurate of rocks are subject to eventual breakdown from miniscule particles of water going through a routine of freezing and melting. This water has to first penetrate the outer rock surface to be able to work its destructive force.

Stock markets have been remarkably resilient to all manner of fundamental weakness and geopolitical pressure thrown at them over the last few years, protected by a thick sheen of central government money in the name of quantitative easing. This scenario is changing!

Quantitative Easing (QE) has been omnipresent in American markets since the stock market nadir back in spring 2009, facilitating an incredible bull market (rising stock market) which has managed to fuel similar rises on other bourses such as London. QE is due to be wound down to nothing in October meaning markets will be free to set their own path thereafter – well, in America anyway.

Europe is due to take over the QE mantle but, and this is a big but, implementation of a fully-fledged European QE program requires approval from ALL member states. What this effectively means is that Germany must foot a greater bill to keep all aspects of Europe together, which is very unpalatable to the German strong house.

Undoubtedly, European growth has been slowing lately, making the requirement for QE greater but bureaucratic red tape will likely mean a protracted negotiating period to convince all member states to participate. This will leave stock markets without their protective sheen.

Icy water particles have been blowing in from Iraq (ISIL), Isreal (Gaza strip) and Russia (Ukraine) which have all been largely shrugged off by world stock markets as an irrelevant nuisance that will blow over. Such nonchalance is misplaced going forward. Russia’s tit for tat seizing of foreign assets has ratcheted up the icy blast heading towards stock markets.

October, ironically just happens to be the worst month historically for world stock market crashes. Both 1987 Black Monday and 2007 financial crashes were confirmed as October events. History is littered with other examples, all attributed to October.

Markets have lost their imperviousness at a time coinciding with increasing geopolitical tensions and scaling up of military intervention by worried Western countries. It is no coincidence that effects are now starting to move markets down from recent highs.

It seems those tiny ineffective water particles so easily shrugged off earlier in the year have found weaknesses in the not so obdurate markets and have commenced their destruction of what has been a great bull market.

Strength is not so easily destroyed though. While there may well be volatile stock markets ahead, a quick sharp drop in markets should galvanise European thinking and posturing into real action that should once again allow repulsion of frost particles, but not before some memorable damage has been done to market prices.

Will this October also go down in stock market history and endorse an already notoriously poor month for world stock markets?

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