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Stock benchmarks and other growth-sensitive assets are struggling to make headway. The FTSE Eurofirst 300 is down 0.1 per cent after the Asia-Pacific region shed 0.5 per cent and as Wall Street’s S&P 500 sees only a fractional gain.
The dollar index, often a good gauge of investor confidence, is rising 0.2 per cent, pointing to a mild waning of risk appetite. Commodities are also struggling, with copper down 0.1 per cent to $3.36 a pound, though Brent crude is up 51 cents to $114.54 a barrel after the US oil stockpile contracted.
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There was little in the way of fresh catalysts for much of the European and Asian sessions to explain the market’s more reticent mood on Wednesday. Indeed, later on, even second tier US data – a weak Empire State manufacturing survey and better-than-forecast industrial output report – have pretty much cancelled each other out.
But the 0.2 per cent dip for The FTSE All-World equity index should be put in perspective. By the close on Tuesday, the All-World had risen 8.5 per cent since the start of June and havens such as US Treasuries had seen profit-taking, pushing the 10-year yield up nearly 40 basis points from the record low hit just four weeks ago.
An easing of eurozone sovereign debt angst and hopes for more central bank largesse have been the main drivers behind the rally. A slight shift in perception of those two factors may be contributing to the less optimistic tone in the current session.
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Regarding monetary policy, it is possible some traders are paring expectations that the US Federal Reserve will introduce further stimulus measures after the country’s retail sales data for July came in stronger than expected, suggesting consumers are feeling more chipper than the market thought.
Support for this line of reason came from the behaviour of gold on Tuesday. The bullion tends to get a boost from the prospect of more quantitative easing, but lost $11 to drop back below the $1,600-an-ounce mark as bets for such Fed action were pared. On Wednesday, gold is up $5 to $1,603.
Investors also appear to be expressing disappointment that China’s central bank has not reacted to a slowing economy with sufficient immediacy. The Shanghai Composite index fell 1.1 per cent to sit less than 1 per cent above its lowest level since March 2009.
Meanwhile, minutes from the Bank of England’s latest meeting showed that while more quantitative easing was considered this month there was a unanimous vote to keep policy unchanged.
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Another factor that may be affecting sentiment is renewed wariness about the eurozone after reports that Greece was seeking an extension to its austerity programme deal with creditors.
This raises the chances, in some investors’ minds, that Greece may leave the euro, delivering another intense bout of eurozone angst.
But the main problem with this theory that a potential “Grexit” is crimping trader confidence is that eurozone stress gauges are exhibiting only mixed signs of heightened tension.
Sure, the euro is down 0.4 per cent to $1.2273. But benchmark Bund yields, which usually fall when investors are worried about the bloc’s “periphery”, are up 8bp to 1.55 per cent, and Spain’s 10-year borrowing costs are down 8bp to 6.65 per cent.
A third issue that may be enticing some mild “profit-taking” is of a technical nature. Some investors have noted that the Vix index started Tuesday’s US session at 13.7, its lowest value since June 2007. It is currently 14.5.
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The Vix is a measure of implied equity market volatility, but is known as Wall Street’s fear gauge because it tends to rise more when the uncertainty reflects a downward lurch in stocks.
So, all things being equal, the Vix’s level suggested investors were at their most sanguine about paying up to protect their portfolios than they have been since before the financial crisis started.
Time and again since the credit crunch such complacency has ended in bull tears.
In mid-April 2010 the Vix fell to 15.6 as the S&P 500 rallied. Less than four weeks later the S&P was 8 per cent lower. In late April 2011 the Vix touched 14.6. By mid-June that year Wall Street stocks had lost 7 per cent. Finally, in late March this year the Vix hit 14.3. The S&P fell 4 per cent in just the next 10 sessions.
Perhaps the low Vix has made contrarians wary.
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