The Two Minute Market Update is intended to keep readers apprised of what’s going on in local real estate markets and in the global financial markets that affect real estate via inflation, interest rates, capital flows and public policy. It is best suited for those not able to keep up with all the news every day, but still wanting to be informed.
Two Minute Market Update, August 13th, 2024
July market statistics were released last week showing the same trend we’ve been covering for the past few months, which is fewer transactions with growing inventory. As the market moves closer toward a bona fide “buyer’s market” at the end of the summer, most are expecting price declines as sellers get nervous their property does not find a buyer before winter.
Lower interest rates are sure to moderate any price declines as buying power increases with every incremental lowering of rates. Since cutting interest rates on July 24th, the US fed has chosen to keep rates steady but signal toward future cuts. Japan has now embarked on a liquidity draining campaign and has increased their rates in an effort to curb their plummeting currency. We flagged Japan on July 2nd as a potential for trouble because of the decades long “carry trade” which has seen Japanese and financial institutions borrow money cheaply in Japan and use it to buy assets globally. Last Monday, August 5th, this blew up spectacularly as stock markets crashed, bond yields plummeted and the volatility index spiked to levels seen only during the 2008 and 2020 market crashes.
Since then, government bond yields have stabilized but are still far below where they were previously, implying a greater chance of earlier rate cuts by central banks. Be careful, however, celebrating this too much. A US rate cut (like a Japanese rate increase) reduces the spread between them, risking a further unwinding of the carry trade and more liquidity shocks. Banks tend not to lend much during these periods as they shore up their balance sheets as a first priority. Other interventions are usually necessary to “keep the (liquidity) party going” if that’s seen as important by policymakers.
Stock markets have mostly recovered, despite this being a “blood in the streets” event as we talked about last update. It is still a dog days of summer environment and volatility is still elevated. Sentiment and psychology are greatly affected by events like August 5th, however. Expectations would be reasonable for continued volatility through the fall. The push and pull between the liquidity issues causing this last swoon and the optimism during a presidential cycle will alternate until one of the narratives proves victorious (or is replaced with new narratives).
Bitcoin has similarly gained back a large portion of what it lost on August 5th, demonstrating that it will still trade as a risk asset not immune to the same liquidity flows as other assets. Outside of such days, however, it’s trading on its own supply/demand fundamentals which are seeing increasing use of it as a corporate treasury asset, component of investment portfolios and with declining available supply. Oil seems uninterested in everything from liquidity events, middle east war drums and hurricane season. It’s price is stuck between $70-90 which provides the kind of stability producers like. Gold has hit a new all-time high above $2500, yet the associated mining stocks lag behind. Neither institutional investors nor retail investors seem very interested in resource companies these days. It’s been more than a decade since Vancouver-based junior companies experienced a boom. If new projects cannot get financed, supply shortages will need to force the issue by increasing price and coaxing out more from existing producers. It’s a situation ripe for mergers and acquisitions – so long as the above liquidity issues don’t stand in the way.
Matthew Stiles
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Disclaimer: The information provided in this column is for general informational purposes only and does not constitute financial, investment, or other professional advice. While I strive to provide accurate and up-to-date information, I make no warranties or representations as to its accuracy, completeness, or reliability. Any actions taken based on this information are at your own risk. Always consult with a qualified financial advisor before making any investment decisions.