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A Mean Reversion

The approaching end of the financial year and increased expectations of central bank stimulus boosted markets across the board overnight. Brexit remains the number one concern for markets, although US interest rates and potential for the Bank of Japan to move are top of local trader’s minds.

Share markets tend to mean revert at the end of the year. An up market will usually sell down, an index that is down for the year commonly rises. This is generally due to the activities of professional investors who must report their annual performance. As the Australia 200 index is down around 300 points over the year, this factor may support shares today.

Predictions about the financial impact of Brexit range from Armageddon to minor annoyance, with almost no respect for the views expressed by campaigners that it could prove a positive factor. However, there is strong consensus that Brexit means US rates will remain lower for longer, and that there is a strong chance that the BoE, ECB, PBoC and BoJ will all act to safeguard economies.

While economists doubt the efficacy of any fourth generation quantitative easing, markets lapped up the idea. Industrial metals, shares and energy all surged, but any idea that this si a “risk on” rally are dispelled by rallies in bonds and gold. Investors may look through the positives around year end to a potentially bleak start to the next fiscal year.



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