Market Watch: ‘Melt-up’ - what’s behind the record breaking stock surge

With fair winds from Federal Reserve rate cuts and China’s new stimulus package the global markets have been experiencing a “melt-up”, says Pie Funds chief investment officer Mike Taylor.

“It’s the opposite of a meltdown, I suppose,” he says. “A confluence of positive events which were unexpected by the market, you know, have, have come to fruition as well as people being positioned for the opposite.

Typically September and October are seasonally weak for markets - in particular, the last two weeks of September, Taylor says.

“I think that would have continued to be the case this year, had it not been for the surprise 50 basis point rate cut and the surprise move with the stimulus in China. Take those two things away and we probably would have seen weaker markets, but those are two kinds of almost game-changing events.”

The stimulus unleashed by Beijing in the past week was particularly unexpected, he says.

The People’s Bank of China (PBoC) has reduced its main policy interest rate from 1.7% to 1.5%. It has also reduced the amount of reserve capital it requires banks to hold.

The cut will add one trillion Yuan (¥1t or $225b) in liquidity to the banking system.

The PBoC also lowered mortgage down payments for second homes from 25% to 15%. It also eased restrictions on borrowing to invest in stocks and shares on Chinese exchanges.

Mike Taylor is founder and chief nvestment officer at Pie Funds. Photo / Supplied

“The size of the stimulus is at the Bazooka level, which is what people had been saying needed to be done. For example, there are $5.3 trillion home loans in China and from the first of November, all of those can be refixed at lower rates. So that’s immediate stimulus there.”

So, just like when a market meltdown, where everybody’s invested and nobody expects bad news, melt-up occurs when people are positioning for bad news and suddenly have to rethink their strategy, Taylor says.

“They’re not fully invested, so they’ve got to chase the rally.”

The US Federal Reserve’s 50bps rate cut has also buoyed Wall Street.

Since the big Fed call on September 18, Wall Street has been on a roll. The benchmark S&P 500 index has hit a series of record highs in the past two weeks.

Risks

There are still risks out there that could potentially derail the rally, Taylor says.

“We’ve got the [US] election coming in early November and it’s anticipated that the result is going to be quite tight. So don’t expect a concession on election night. It could drag on for some time.”

That could leave markets uncertain, Taylor says.

Then there was the increased Middle East tension.

But despite some jitters overnight on Tuesday as Iran entered the fray, the market fallout has been limited, so far.

Markets were determined to try to ignore what’s going on in the Middle East, Taylor said.

Oil prices have remained relatively low.

But it would be foolish to dismiss the risk, especially if Iran continued to escalate, Taylor said.

“A spike in oil prices maybe to US$100 plus if that occurred would be negative for markets.”

The Market Watch Video is produced in partnership with Pie Funds

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003. To sign up for his weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide, click here.