Turmoil on the Markets, and Tranquility in Davos – Why the Discrepancy?

In January of 2016, while markets were spiralled in a series of dramatic sell-off and extremely high volatility, the world’s economic elite gathered in Davos for the annual World Economic Forum. Despite all the panic and volatility, monetary policy makers express surprisingly high optimism and calmness. “I don’t think the markets are melting down. When markets adjust, there is always uncertainty and volatility, but it’s not a meltdown,” said Min Zhu, deputy managing director of the IMF. In the meantime, the situation in the global markets is not that pleasing – the Dow Jones index was 245 points or 1.5% down in one day, and London’s bourses were also deep in the red, while decreasing oil prices kept adding further pressure on the global stock markets. Overall, the mood of investors was everything but sanguine.

However, not everyone in Davos shared such positivism for global markets, and not everyone joined to investor’s not-so-cheering front. “What is going on now is a message that the excessive optimism that has been spreading around is wrong,” said Nobel prize-winning U.S. economist Joseph Stiglitz, in sharp contrast to ECB president Mario Draghi, who stayed adamant that plenty of economic controlling instruments were available and reliable for supporting economies across the globe. Numerous discussions were devoted to China, as well. Investors who worried about China’s economy were somewhat cheered up by the IMF’s representatives, “China’s economy will probably slow down – but it won’t be as bad as some suggest.” The situation may not be great in the markets, but leading authorities in Davos express confidence that there are no signals of a forthcoming financial crisis on the horizon.

Currently, two diametrically different opinions are governing the mood. Investors believe that situation in the markets will get only worse. By contrast, if you have trust in the IMF and ECB’s leaders – keep calm and do not panic about equity markets – just a slower economic growth can be expected. It seems that the truth is somewhere in between, and 2016 will show who is right.

By Toms Talo
Market Analyst at the Investment Fund