This Market Bulletin has been produced in association with Jupiter.

Its intended to provide you with a look back at the events that have affected
the performance of global equity markets in the last fortnight. This is a general market update and should not be considered a comprehensive or
suffcient basis for making decisions.
It can be useful to step back from the day-to-day noise of specifc markets and focus
on the big picture. The price of any fnancial asset is determined by the marginal
buyer or seller. A price deemed cheap will attract buyers, and consequently the price
will rise; the opposite is also true, expensive assets will be sold to secure excess
profts, and prices will fall. Thats the theory, anyhow.
In the real world, however, fnancial markets have a nasty habit of operating
somewhat differently, with a tendency to over-shoot and then mean revert. Certain
fnancial asset markets today are probably as far away from their theoretical
equilibrium as they have ever been. This is not to say that all assets are wildly over-
valued, but the prices of some fundamentally make little sense.
The root cause of this is manifest: having allowed the global fnancial community
to run riot multiple times in the last two decades, the gatekeepers of the system
have subsequently acted on each occasion to save the reckless participants from
themselves. But, by doing so, they have distorted the next cycle.
Today, six years after the latest systemic shock, we are again confronted by multiple
distortions. The price of money (as measured by interest rates) and monetary policy
have probably been too accommodative for too long. As a result, the current situation
is substantially different from anything that investors have experienced before.
Investor behaviour is also different; for example, reaching for yield at all costs has
become a common practice. But now, the most signifcant monetary spigot of all, that
controlled by the Federal Reserve, is gradually being closed. At the time of writing, it
would appear to us that it will be shut completely by late autumn.
Whether it is or not, there is no reason to expect the future to revert to normality
until that excess liquidity has receded. Once the liquidity fow drops to zero, the
next logical step for markets to focus on is its withdrawal and a rising interest rate
environment. The worlds second largest economy, China, is in a similar position. The
new Chinese leadership appears to be keen to row back from the excessive policies
of its predecessors. Spotting distortions is one thing; imagination will be required to
fgure out if, how and when they will mean revert.
Why is the US reducing stimulus now? The offcial answer would surely be: the job
is done, its no longer required. The slightly cynical realist may propose: theyve
overdone it, and they know it. Either way, the US economy currently appears
healthy enough to support itself. This is, in our view, a major positive. Many sectors
of the US appear to be functioning well; the shale revolution, demographics,
manufacturing competitiveness, healthy banking system and productivity advantage
have all played a part.
If one asked the new Chinese leadership the same question we suspect that of the
two answers given above, the latter is far more realistic. China is an aberration, a
command economy concurrently pursuing a capitalist, market philosophy, and as
such they have an ability to solve problems of excess like no other nation can. China
may therefore be able to avoid much of the direct fallout from her past excesses; the
most acute mean reversion might be experienced elsewhere.
China is to todays global economy what the US was in past cycles; the marginal
buyer, therefore the price setter of many commodities. As China weans herself away
from fxed asset investment dependency, towards a more consumer-driven economy,
commodity prices should adjust accordingly. This could prove be to another huge
fllip for the consumer-dominated US economy, as lower commodity prices supress
infation.
Nonetheless, as stimulus is withdrawn, certain areas of bond markets appear to us to
be vulnerable to correction, while equity markets remain mixed. At this juncture, it is
critical to remain alive to the factors, be imaginative and to act accordingly; at least,
thats the theory.
Weekly Statistics (source: FT)
Key performance indicators (as at Friday 30 May 16:35 GMT) Day-by-day analysis of FTSE 100 Index
CURRENT
VALUE
10 DAY
% CHANGE
FTSE 100 6,834 -0.09%
Dow Jones 16,671 +1.37%
Nikkei 225 14,632 +3.76%
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