Despite a better start to the month post “Red October”, uncertainty remains surrounding the global equity environment. Wall Street finished last week on a poor note and took that mood into Monday, passing the blues to the rest of global equity prices. Bond prices rallied as investors looked for safe havens. Technology shares, for so much of the year the darling for investors once again finding selling pressure. Concerns that Apple iPhone sales may be stalling post comments from a supplier adding to the gloom. There does appear to be something of a consensus view developing that the correction we recently have had, has not been severe enough and also, unnerving as it is difficult to justify as the fundamentals remain intact.
Goldman Sachs research recently produced in interesting chart reproduced in Market Watch of their Bull Bear Market risk indicator. This chart has the highest reading since the 1960’s and 70’s according to Goldman research and is consistent with zero returns in the coming 12 months, with a few exceptions. Then one finds that the Wall Street Journal surveys 60 economists on 10 economic indicators on a monthly basis. One of which is the probability of a recession. The result economist still rate the probability of a recession below here they did in early 2016.
It is strange to see stock markets correcting as the fundamentals remain solid. Earnings are expected to grow; the global economy is likewise. Monetary policy remains largely supportive although that may change in the coming months. The oil price which can often be a cause of an economic downturn has recently given back a lot of the gains. What the Goldman chart may be suggesting is that Goldilocks porridge is getting a little too hot and that is causing investor concerns.
Problems remain in Europe aside from Brexit as the Italian Government looks unlikely to change its stance on the budget proposal. This is despite popular opinion within Italy that possibly they should.
Sterling rallied sharply on Tuesday on speculation that a deal over Brexit had been reached. Theresa May, according to the Financial Times, has summoned her government after agreeing the text for a withdraw from the EU. This rally in sterling may be short lived as this deal is unlikely to be accepted by either the cabinet or by parliament. If many of the press reports are to believed, this deal may be unpalatable to both sides of the Brexit debate.