The fundamental drivers of markets

Hello, it's Friday the 30th of January. Lots to report over the last couple of weeks. Most notably, I suppose, Davos, which some years is really little more than a bit of a talking shop with the great and the good there. This year, lots of politics, lots of diplomacy going on and some significant pronouncements over the course of the conference. Greenland, obviously. Most importantly, Donald Trump seemed to move away from any sort of military intervention with respect to Greenland, which is obviously positive news and received well. But there was obviously this sort of political friction. You had a number of European states that are standing up to Donald Trump, a number NATO states that are standing up to him as well. Mark Carney, the Canadian PM. So there were some divisions really, sort of evidence of Davos it perhaps haven't been there in in recent years. We had last year the regular refrain 'TACO', Trump Always Chickens Out, particularly with respect to tariffs. This year so far we've had a slightly different version of that, which is take the president seriously, don't necessarily take him literally, and Greenland really sort of being a case in point with that with the military intervention being wound down. Other examples, you know, coming at the moment, is that armada heading to Iran? You know, he's been pretty vociferous about the government's behaviour there as well. We'll have to see how that pans out. There has been a bit of a move up in oil, but so far really back to levels of September-ish last year. So nothing particularly dramatic there. And then in terms of the market impact of Davos, that's been relatively modest as well. We had the VIX, the volatility index come up a little bit, that was mentioned in the last video. It's remained higher than the no-risk kind of levels that we see in quieter moments in the sort mid-teens. It sat around sort of 18, 19 level today. And just as a reminder, VIX is priced off options. So it's essentially a measure of the cost of insurance against the moves in the stock market. And so people are paying up a little bit for that insurance, but not a huge amount yet. We also had the Board of Peace, which is an interesting mix and no notable European participation there, for example. So it really was an odd Davos, one that we'll remember for years to come, as opposed to many that fade away from the memory. 

What has been the impact on investors? 

But the market impact has been relatively modest so far. Bond markets have sort of drifted around a little bit. The area we have seen some bigger moves is in gold. That is in many ways perceived as a store of value, a sort of safe haven, and it's gone through $5,000 per ounce for the first time in history this week. It has come back a little bit from that peak, but there are other reasons why that might be going up. Aside from pure risk aversion, it is used as a  store of value by governments and central banks. It does sit underneath some stablecoins as an asset to provide backing to those. There's also, of course, jewellery and all those sorts of demands as well. Part of it also, of course possibly the weaker dollar as gold's going up, reported in dollars, the weak dollar is going to reflect on the other side of that equation essentially. 

On the weaker a dollar, we had the Federal Reserve decision this week to keep interest rates as they are, having had three successive cuts in the tail end of 2025, it makes sense to sit and watch and see how that feeds through into the data before doing more. We'll of course hear more about the Federal Reserve governorship or chairship as the year goes on. We'll pick that up in future videos. There seems to be a couple that have a narrow number of front-runners. It's not always the same person, though, depending on what you read, so there could still be a bit of a surprise coming through there. On the weaker dollar, the president this week said he wasn't too worried about it. It served to see the dollar weaken further. Since then, it has been sort of talked back up again, but overall it's hard to conclude that a weaker dollar isn't sort of an unofficial US government policy seeing as how they have been pretty relaxed about it over the last year or so. And obviously, as they want interest rates to go down, interest rate parity would imply that should lead to a weakening, at least based on interest rate differentials in your currency. So if you want your interest rate to go to down, your central bank to push down your base rate, it's likely all else being equal, your currency will become weaker as a result. 

So if Davos hasn't really moved markets that materially what has? Well coming back to good old fundamentals; company results. I think yesterday actually was a really great example of how impactful results can be on business performance and an order of magnitude greater than anything we've seen from Davos or anything like that. So we've had some tech reporting over the course of the week. Microsoft disappointed in terms of its results and the shares were down 9.99% yesterday. Meta, on the other hand, came out and surprised everyone positively with their results and their stock price is up essentially the same amount. I think it was up a touch over 10% on the day. So these are massive businesses. Market capitalisations in the trillions of dollars, moving 10% on a day. To give you some context for that, in round numbers let's say, Microsoft, around about a three and a half trillion dollar company, if you're moving 10%, you're talking around about $300 billion wiped off the value of that company over the course of a day. The company itself hasn't fundamentally changed materially over the course of that 24-hour period, but what has changed, is the market perception of the future value of the income and the profitability to that business. HSBC in the UK, the market cap's around about £220 billion. You convert that into dollars at a rate of about £1.4, you get very close to $300 billion. So the scale of that loss in market capitalisation in Microsoft over the course of the trading session yesterday is roughly the same as just wiping off HSBC. So that gives you a feeling for how big the moves in those stocks were yesterday because they're very big names and that's a high level of volatility from that sort of business. And generally speaking, the larger the business, you would expect greater certainty around the business model. You'd expect more gentle price moves perhaps, there are of course exceptions to that, but to move 10% in a day and be that size is pretty unusual. And again, it's a reminder of how, as much as there's a lot of good news around the business models that these businesses have, there is a lot of question marks over the fine print and it could go either way. So we need to watch these very carefully. At an index level, because you've got this sort of discerning approach, some winners, some losers, the impact of that is diminished because of diversification, because of intra-stock movements, diversity in terms of returns on the day. But obviously if these were to move and everyone sort of starts heading in the same direction, if sentiment shifts on a universal basis rather than then on a selective basis, this intra-stock volatility will drop, everything moves in the same direction, and that's when you get the big moves in markets. So stocks of this size generally tend to be a bit more lumbering. They tend not to have that kind of volatility. It is unusual, but again, it's just a reminder that where there's a lot of good news, you need to be careful and make sure you have other assets, lots of diversification in there to reduce the sensitivity of these kind of scales of moves. That's it from me. Have a good weekend when you get there and we'll see you next time.