What Could Possibly Ruin Traders’ Summer Vacations?
August is known as a month of quiet markets and sleepy sessions, but investors should know better than to rule out surprises
HONG KONG—It may seem like the dog days of summer for investors. But August is known for offering financial markets a range of surprises.
Trading has slowed as stocks have risen steadily around the world, a reflection of quiet markets and sleepy sessions that have stretched from Asia to Europe to the U.S. Volatility has remained historically low, traders have fled for vacations and pullbacks have been nonexistent.
Two years ago this week, though, China ruined the summers of many foreign-exchange and equity traders with a surprise devaluation of its currency. The move not only stoked fears about the world’s second-largest economy, but it also rippled across Asian markets and sent tremors around the world. Chinese stocks plunged and its forex reserves fell, putting an abrupt end to a sleepy summer.
Few at the moment expect a repeat of such magnitude. In China, reserves rose in July for a sixth straight month and the yuan has gained about 3% against the U.S. dollar this year. A rebound in exports fueled stronger-than-expected economic growth of 6.9% in the year’s first half.
Asian stocks, broadly, have rallied as a result. Hong Kong’s Hang Seng Index, which has risen in 19 of the past 22 trading days, is up 26% this year and is among the world’s top-performing indexes.
The MSCI AC Asia Pacific ex-Japan Index, a broad barometer that counts big Asian companies listed globally, is up 25% and trading at nearly a 10-year high.
Even hedge funds, long criticized for high fees and underperformance, are doing well in the region. Chinese hedge funds gained 16% in the first half of the year, significantly outperforming a benchmark tracked by data provider Hedge Fund Research. In the second quarter, Asia hedge funds collectively attracted their first quarterly asset inflow in two years, HFR said.
“It was a very good first six months for a lot of hedge funds and portfolio managers,” said Arthur Kwong, head of Asia-Pacific equities at BNP Paribas Asset Management in Hong Kong. “If you made a lot of money in the first half, there’s little reason you need to take extra risk in the summer months.”
The situation in other parts of the world is similar. In the U.S., the Dow Jones Industrial Average rose above 22000 last week for the first time in what has been a methodical move higher. Through last week, the Dow’s average daily move in either direction so far this year has been 0.31%, the smallest swing in 53 years, according to The Wall Street Journal’s Market Data Group. Ten years ago, this average daily move was more than double its current level.
August is typically a time for slow trading volume, too. Average daily activity in early August, measured by NYSE composite volume, has been lower than this year’s daily average, according to FactSet.
History shows that just because markets are quiet now doesn’t mean they will stay that way for the rest of the summer.
In August 2011, Standard & Poor’s surprise downgrade of its U.S. debt rating prompted some of the most volatile days on record for U.S. stocks. In August 2007, the subprime mortgage meltdown in the U.S. was morphing into the global financial crisis. And in the summer of 1997, a financial crisis that started in Thailand eventually spread throughout Asia, as currencies of many of the region’s hardest-hit economies like Thailand, Indonesia, Malaysia and South Korea lost more than 50% of their value against the dollar.
Of course, geopolitical risks remain today. Just this week, North Korea threatened to use nuclear weapons against the U.S. if militarily provoked. Yet the increased nuclear threat from North Korea has repeatedly failed to rattle financial markets.
For now at least, investors say they wouldn’t be surprised if the calm in the markets continued.
“Nowadays, the market is behaving quite differently from the big moves in recent summers,” Mr. Kwong said. “But when everyone comes back from vacation, I’d still expect more volatility in September and October.”