Twitchy markets prepare for September uncertainty

Most analysts say September, not October or April, is the cruellest month for stocks. That could get worse if central bankers take away the punch bowl to end the party.

New 'taper tantrum,' China intrusions add worries to a volatile month for stocks

Beijing's 'regulatory storm' affected tech companies this week, including Chinese ride-hailing company Didi Global — just one of the events making markets nervous as September nears. (Brendan McDermid/Reuters)

Partly because of a number of famous market routs — including the Great Crash of 1929 that led to the Great Depression of the 1930s — October has a bad reputation in stock market trading.

The purported market wisdom of "sell in May and go away" seems to declare the time to be wary is the summer doldrums — when market professionals repair to their vacation homes, leading to thin and thus volatile trading in June, July and August.

But despite's T.S. Eliot's poetic vote for April, in the world of stocks, September is the cruellest month.

And as this September approaches and Canadians continue to enjoy their election, traders in what have seemed like irrepressibly soaring stocks say they are watching warily as a conjunction of unusual market pressures pile on to the usual September uncertainty.

A series of odd events

Market analysts describe a series of odd events, some foreseen, others less so, that are leading to market anxiety — from a renewed threat of COVID-19 outbreaks in the form of the delta variant, to China's heavy-handed interference in markets, to the worries that the U.S. Federal Reserve is about to begin cutting back on the stimulus that has helped propel stocks.

"If we didn't have delta, Beijing's crackdown would have been the No. 1 story," Edward Moya, senior market analyst for the Americas at OANDA, a U.S. firm that specializes in the impact of global events on currency markets, said in a phone interview on Friday.

Whether COVD-19's delta variant will have a strong impact on markets continues to be disputed. After all, stocks — and many companies' profits — have continued to climb through the worst of the past year and a half's pandemic disruptions.

WATCH | U.S. extends border restrictions with Canada until Sept. 21:

U.S. extends border restrictions with Canada until Sept. 21

2 years ago
Duration 3:24
The U.S Department of Homeland Security said that the delta variant and case counts are the reasons for keeping the country's land border closed.

The effects of China's unexpected and difficult-to-comprehend crackdown on the country's own publicly traded companies has had a very concrete effect, with Reuters reporting on Friday that "half a trillion dollars [were] wiped from China markets in a week as clampdowns shatter confidence."

What seemed like politically motivated actions by Chinese leader Xi Jinping, attacking some companies — including ride-sharing firm Didi, Jack Ma's influential Ant group, tutoring companies and the world's biggest gaming giant, Tencent — while leaving others alone, remains opaque to hard-headed market traders.

Chinese regulatory storm

Some say the latest Chinese "regulatory storm" has a domestic political purpose, redirecting investment from internet companies to harder tech, or reducing the financial burden on young families, but until Beijing signals those attacks are over, they could continue to unsettle markets during September, especially in the globally connected tech sector.

"Almost on a daily basis you have negative news coming out, so it forms the impression there's no end in sight," Singapore trader Dave Wang told Reuters, a view echoed by Moya.

A reason many argue that, by itself, a surge in the delta variant would not hit markets is that previous outbreaks have been accompanied by continued monetary and fiscal stimulus. But that changed last week, as minutes from the Federal Reserve put markets on notice that the central bank will begin to taper its bond buying, called quantitative easing, that has helped to keep money cheap.

Investors are waiting for a potential 'taper tantrum' as central banks hint that they will take away the punch bowl of cheap money and stop the party. (Everett Collection/Shutterstock)

The official announcement could come in Fed chair Jerome Powell's next monetary policy statement toward the end of September, leading to market nervousness that a new "taper tantrum" could send stocks spiralling down once the Fed signals stimulus is fading. That could be a warning of that nerve-wracking time for stocks, when central banks end the market party by "taking away the punch bowl" of cheap money.

"We're approaching the removal of some of that stimulus from the Fed," Moya said. "Which means the end is in sight for this punch bowl of stimulus."

Avoiding election interference

Canada's central bank has already formally announced it will wind down bond buying. And while the Bank of Canada brings out a monetary policy report of its own on Sept. 7, it would be highly unusual for governor Tiff Macklem to make any important moves while a federal election is in progress, to avoid the appearance of interfering.

That said, a sharp market decline, even if it would be hard to blame on the government, would be more fodder for election-time criticism.

For Canadian stocks in particular, a slump in the price of oil — a big component of Canadian indexes — has been blamed on falling global demand due to the delta variant.

But another oddity affecting a traditional Canadian sector has been weakness in gold. Despite being seen as a hedge against inflation and other market worries, the precious metal is now down 14 per cent from last August. That may actually be a sign of longer-term economic confidence.

While market lore about good and bad months is based on a long history of market trading, there is a new wind blowing through stock markets these days as young, small-time meme traders who amused themselves during a long pandemic have played an increasingly influential role.

It is hard to know whether those traders — who share their views on the social media platform Reddit and who have repeatedly intervened to stop their favourite stocks from sliding — will make September volatility better or worse.

Last week, when one of the favourite trading platforms for the Reddit crowd, Robinhood, warned that retail investors could be fickle, its own share price tumbled about 10 per cent.

Not all Septembers are bad for markets. Despite the list of arguments for September nervousness this year, there is another alternative.

It's that the markets continue to do what they've done throughout the long pandemic recession — in other words, to trade, not on current worries but in anticipation of a strong economic recovery once the pandemic has finally run its course.

Follow Don Pittis on Twitter @don_pittis


Don Pittis

Business columnist

Based in Toronto, Don Pittis is a business columnist and senior producer for CBC News. Previously, he was a forest firefighter, and a ranger in Canada's High Arctic islands. After moving into journalism, he was principal business reporter for Radio Television Hong Kong before the handover to China. He has produced and reported for the CBC in Saskatchewan and Toronto and the BBC in London.