Volatility to Dominate Stock Markets in June Too

After the worst May for the Dow Jones index since 1940, fueled by fears over Europe’s debt crisis, concerns over Chinese tightening and financial regulation, some were hoping for a better June.

New York Stock Exchange
Photo: Oliver Quillia for CNBC.co
New York Stock Exchange

But as Wall Street returns to work after the long weekend, uncertainty remains elevated and volatility is expected to remain high.

Analysts expect fears over the debt crisis in particular to keep stocks under pressure and some are even warning about random policy mistakes that could exacerbate insecurity.

Others say that the trigger for a further fall in stocks could be the beginning of exit strategies and the dwindling liquidity accompanying it.

A look at some of the headlines facing investors as they return to their desks this morning does not provide very cheerful reading.

‘ECB warns of $279 billion of further losses for Europe’s banks’, ‘China property risk worse than in US’, ‘Europe's house prices may not have stopped sagging’ and ‘Nikkei tumbles briefly after erroneous trade’ are just some of Tuesday's stories.

“Near-term factors like the euro zone debt crisis are likely to lead the market lower” Robbert Van Batenburg, head of research at Louis Capital Markets tells CNBC.

Bur selling in the current market could be the wrong call, Van Batenburg added.

“The American economy is recovering and consumer confidence is on the rise,” he said.

Others expect the European debt crisis to drag on.

“European governments now have to prove that they are able to better co-ordinate fiscal policies, to adjust liabilities related to the welfare state and to provide flexible support for private entrepreneurship” Arnaud de Servigny, the head of research analytics at Barclays Wealth, said.

“Proving their competence will take time, the transition period will be costly in terms of growth, but cannot be delayed any further. Credibility is at stake,” de Servigny explained.

Policy Mistakes and Exit Strategy

Vince Farrell, the chief investment officer at Soleil Securities, told CNBC that policy mistakes could be a problem over the coming month.

“Take a look at the German ban on naked short selling, without co-ordination you get market uncertainty. Governments are looking out for themselves and destroying market confidence,” Farrell said.

Speaking in Brazil over the long weekend, Nouriel Roubini warned developed economies face years of anemic growth, while warning of over heating in emerging markets.

“The risk for emerging markets is overheating and asset bubbles. Interest rates in advanced economies would remain close to zero for a longer time and it was time for emerging markets to remove economic stimulus to avoid forming an asset-price bubble," warned the man also known as Dr Doom.

Stephen Lewis from Monument Securities says liquidity has been the key to the gains made by riskier assets since the March 2009 lows and worries what will happen when the central banks turn off the cheap money.

“The rise in high-risk asset markets started shortly after the Fed began its liquidity-easing asset purchases," Lewis said.

"Indeed, champions of the 'quantitative easing' that such purchases represented argued at the time that part of its beneficial impact on the economy was coming through its effect in lifting asset prices and enabling borrowers to raise funds more cheaply,” he added.

With the term exit strategy not exactly making headlines at the moment, Lewis is now fretting over its impact on riskier assets like equities.

“It always seemed, however, that the less favorable liquidity conditions that would follow the cessation of the QE operations would bring a sharp reversal in those asset prices that had previously benefited from the liquidity-creation," he said.

"Within four weeks of the Fed's ending its MBS and agencies program, US equities had topped out. They have since lost about 10 percent. This was always the danger with QE as we continually pointed out,” Lewis said.