Turbulent Times

05/07/2013 at 5:11 pm

“As a bear case it is a tempting proposition. Just when we have all started ignoring Europe, a new bailout or political upset will come along and upset the apple cart again.”

So this blog speculated all of seven days ago. Since when, two shock ministerial resignations in Portugal threatened to bear the point out directly.

Markets appear to be considerably less fragile than they were a couple of years ago, but this is still the kind of surprise they can do without. On Wednesday the Portuguese stock index fell by more than 5% and the country’s ten year bond yield rose from 6.5% to an intraday high of almost 8%. It looked as though the European drama was about to begin yet another deadly act.

Perhaps it was fortunate that attention was distracted by revolution in Egypt that very day. This was received more favourably by local markets, with the Egyptian Exchange index 7% higher on yesterday’s close. And as of this afternoon, negotiations in Portugal seem to have headed the crisis there off: bond yields have settled below 7% again and the equity market has recovered about half its lost ground so far. (German finance minister Wolfgang Schäuble did make one ominous comment though: “I think the euro is now viewed on the world’s financial markets as so stable that domestic political situations in individual countries … don’t mean a crisis for the stability of the euro as a whole.” So we can’t be out of those woods yet.)

If nothing else, the relatively sanguine response to these events tells us something about market confidence. The absorption of Portugal’s left-field political turmoil in particular is worthy of note. Above all, however, they remind us that we cannot plan for tail risk, and we certainly cannot be sure exactly what the view round the next corner is going to look like once we get there.

Lacking omniscience, we have a clear choice. We can allow ourselves to be spun into a dizzy panic by day-to-day news flow and volatility. Or we can follow the fundamentals, watch what happens to pricing – and try not to get so thunderstruck we lose the conviction to exercise our judgement accordingly.


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