Euro summer madness is making markets look extreme

If you were going to launch a big debt or equity capital markets deal this week, forget it—markets have the jitters. 

But it was never going to be a busy week for deals. As we sit here in the middle of winter, it is easy for us to forget that the big northern hemisphere markets are in summer holiday mode. They are on the annual go-slow until the end of the month, a holiday period exacerbated by the Olympic Games in Paris.  

So, while the market has sold off hard on fears of a recession in the United States, or perhaps just to take some of the heat out of an exuberant nine months, you have to remember what market conditions are like during the holidays. It is quiet. Liquidity is not what it would normally be.  

That’s a timely reminder from ING’s Andrew Bester, an executive team member and head of Wholesale Banking at the €51 billion ($86 billion) Dutch bank. He is in Australia this week for that very reason—there is not a lot of work to do in his usual London and Amsterdam boltholes.  

“Some market movements get slightly exaggerated because of a lack of liquidity,” he says at ING’s Sydney office, having flown in from Perth on Tuesday morning. “It is quite hard to fully judge sentiment; there are dislocations that can happen at this time of year.”  

So, Bester, a seasoned global banking executive, says that despite the market rout, the alarm bells are not ringing inside ING’s Amsterdam headquarters. He reckons it will take time to work out how worried investors are about the prospects of a recession—and we may not know properly until the northern hemisphere’s summer is over. 

It is worth remembering there are two parallel games going on; the market and the economy. It is investors’ job to try to get ahead of the economy by forecasting profits and earnings and interest rates one, two, and three years out; and it is that guesswork that has markets up or down on any given day.  

When panic sets in, sometimes the underlying economy gets forgotten. Yes, a worse than expected jobs number or some other economic reading may trigger the panic, but the market can make a mountain out of a molehill.  

It does not take much for trading desks, which thrive on volatility, to ramp up calls for interest rate cuts and the whole story grows more legs. Pretty soon leveraged investors sell stocks to unwind positions, and the whole thing can escalate quickly. The VIX Index went through the roof on Monday night.  

As far as Bester is concerned, underlying economic conditions are good. Market conditions were also good, until they weren’t, which coincides with the holidays and makes it all harder to read. He isn’t cancelling plans to double the size of his 52- strong Australian wholesale banking team; far from it. He wants to finance more big Australian companies’ energy transition plans.  

“Structurally, if you look globally, the banking system is in robust shape,” he says.  

“Eurozone banking is in particularly good shape. You always need to watch these corrections … but I do think one has to be a little bit sanguine this time of the year because of the low liquidity.”  

So, while Bester is watching interest rates and interest rate expectations like the rest of us, he says as a banker you have to “keep your shape” in times like this. He has seen it before during summer holidays.  

When the European summer started – before that US jobs number – markets were in strong shape. Investors were piling into debt capital markets and loans deals, with books often multiple times oversubscribed, showing a willingness to deploy funds. Equity markets, including in Australia and the US, were also at record highs. 

Bester, whose wholesale banking unit includes ING’s capital markets and syndication arms, says a lot of companies made the most of steady markets in the first half of this year and even into July, in case it got more choppy in the second half. The big event on the calendar is the US election. 

“We look at what’s happening in the real economy in the US,” he says, when asked about the upcoming election. 

“Our business has continued to track ahead of our expectations, continuously, with resilient pipelines and good levels of client activity.” 

So, what does that say about whether the Federal Reserve will cut rates in September? Citigroup economists, for example, have called for 50 basis points of cuts in September and November, while economist and professor at Wharton, Jeremy Siegel, demanded a 75 basis point emergency cut overnight. 

“We’re plateauing,” Bester says. “And we are getting close to the inflection point.” But he predicts central bankers will stay cautious – they do not want to cut until they are sure they have inflation “firmly in check”. The market mood shifted on Tuesday after two days of heavy selling that took 5.7 per cent off the benchmark S&P/ASX 200. 

Australian shares bounced around waiting for a firm lead ahead of the Reserve Bank’s cash rate decision. Some of the stocks heavily sold on Monday were bought again on Tuesday, but on pretty light volumes, which makes it harder to read. 

Originally published in Australian Financial Review: Opens in a new tabhttps://www.afr.com/chanticleer/euro-summer-madness-is-making-markets-look-extreme-20240722-p5jvft