Ouch!

Equity markets around the globe continue to adjust to the concerns regarding US interest rate policies alongside the various geopolitical risks that we have discussed on more than one occasion in these commentaries. It may be worth putting the recent falls into context. Japanese equity markets have now entered bear market territory, defined as a 20% correction. The S&P 500 is now down on the year after Wednesday night’s falls, as the index has fallen for 6 days on the trot. So far this is the worse month for the S&P 500 since February 2009. The worse valuation correction since 2008, 3 trillion dollars or 15% of global GDP been wiped off the value of US equity markets. The MSCI all-world index is now down over 5% on the year to date. Smart money flow index, which we talked about a few weeks ago as a possible warning sign for equity markets, continues to suggest smart money coming out.

 Equity sell-offs often encourage investors into bonds. So far, we have seen little movement in the bond market as yields have remained little changed during this equity market correction. Most corrections are swift however this slump in terms of rate of change is the fastest since 2008.  There is not much in the way of good news at present, possibly one is the oil price has fallen in the past week despite increase Middle East tensions. The fundamentals for global equities remain supportive, equity investors are possibly reacting to, is this as good as it gets? The Vix index closed Wednesday night back at 25, the point at which equity markets in the US have stabilised, if only briefly in the recent sell-off.

As the president of the United States continues to chide the Federal Reserve for aggressively raising interest rates, will this recent bout of volatility encourage the Fed to pause? We would think, not at this point, however, the market has reduced the odds of a fourth-rate hike in December. Remaining on the subject of interest rates, the ECB announced their monthly interest rate decision on Thursday.

These meetings always create interest, this meeting was going to be no exception as there are signs the European economy is slowing an example of which came from the latest Purchasing Manager surveys this week, as the ECB looks to end their QE program. The ECB reiterated their desire to continue to normalise monetary policy and stuck to expectations the first interest rate rise will be late next summer. Mario Draghi’s views on the Italian government were resilient that the ECB will not come to Italy’s aid. Time will tell.

 

 

Posted on October 26, 2018 .