The NASDAQ index finished the third week in a row in the red, however, Wall Street itself managed to break a three-week losing streak. The FTSE 100 likewise making some modest gains in the past few days. The Vix index fell on the week, having hit the highs of earlier in the year. The Russell 2000 of smaller cap stocks continues to underperform the larger S&P 500, not such an encouraging sign. The price of Brent crude fell on the week. The US treasury market showed little reaction to the release of the minutes of the last Fed meeting. We are now deep into third-quarter earnings season, according to Factset, admittedly after only a relatively modest sample size, 83% of companies that have reported have beaten analyst expectations. As much as earnings season always influences investor sentiment there remains enough macro event risk to focus investor minds into the coming weeks.
The minutes of the Federal Reserve released on Wednesday night, despite their more hawkish tone, equity and bond markets took them mostly in their stride. Treasury yields fell very modestly and the spread between the two year and ten-year yield has settled around 30 basis points. As the bond market has settled, this did appear to settle equity investors, however, Thursday saw the return to equity volatility. The US dollar rose, post the release, and gold fell in reaction to slightly higher bond yields. The price of oil fell after the release of some US inventory data, the equity market could remain as sensitive to any moves in the oil price as it is to US interest rate expectations.
Without particularly wishing to add to the mountain of words that have been written discussing the ins and outs of Brexit. We would like to make just one observation. During any political event, what one should always take note of is what the market is telling you, one would suggest in particular the currency. Europe’s recent rhetoric has been suggesting they are close to a deal, probably trying to force the outcome. On the other hand, there is also talk of a strong possibility of a no deal being expressed. One would expect, if the outcome was a no deal sterling would suffer. Despite the talk of no deal and threats of mutiny within the Conservative ranks, recently sterling has been resilient against both the US dollar and the Euro. This could suggest that speculators believe that a no deal outcome is unlikely. It could also suggest that the market is backing Theresa May’s ability to persuade parliament that a watered-down Brexit is acceptable. The bookmakers now have 2019 as the front-runner for the year of the next general election.
American equity markets had, until this week, managed to avoid the general sell off that had been occurring in China and Europe in particular. This week they finally reacted as leading US equity indexes fell around 4%, even after a 1% recovery on Friday. The Dow Industrial index falling 1400 points in 2 days. The FTSE 100 falling a similar amount this week and has now fallen 9% this year in absolute terms. The Vix fear gauge climbed to 25 at one point this week, the same level it got to during the correction period earlier in the year. These times then bring on debates about market crashes, is this the end of the Bull market? The start of the next bear market?
Equity markets in the US are finally catching up with the recent rise in bond yields, as is always going to do at some point. Donald Trump did not help matters describing the Fed as crazy and making a “policy mistake”. The suggestion of a policy mistake is something equity markets have debated and given the Fed the benefit of the doubt over. By suggesting they have made a mistake, obviously will unsettle equity investors. History tells you that bond yields rise, equity markets correct to adjust and then, assuming forecasts for economic growth remain intact, recover once again. The IMF, at its annual conference, did marginally lower their economic growth forecasts for the coming couple of years but are nowhere near predicting a global economic recession.