Our weekend optimism seemed misplaced as equity markets took a beating on Monday. Whether it was a concern that the upcoming G20 meeting would intensify the risk of trade wars. The threat of a more hawkish Federal Reserve on Wednesday, or the fact that credit spreads had continued to widen or a combination of the above, caused the selloff. The FTSE 100 has now given up all and more of its gains from last year. European equity prices have underperformed for a while. The bulk of the rise in the global index has come from emerging markets and the US.
There was little in the way of good news on Monday aside from a bid for the UK property company Hammerson. Technical analysts were pointing to death crosses on several indexes. The point on a chart when the 50-day moving average falls below the 200-day average. Microfocus share price halved after announcing weaker than expected revenues and guidance going forward. Retailers continue to struggle as Carpetright shares fell over 10%. The Nasdaq index did not miss out on the bloodbath as Facebook shares fell over 5% on allegations to do with the US Presidential elections. This seemed to be the catalyst for a wider selloff in the technology sector. Sterling rallied on Monday as the latest round of Brexit talks produced a draft transaction agreement.
At times like this, one would have expected the oil prices and US Treasury yields to fall. If there is a general flight to safety money flows into bonds and out of oil and stocks. However, on Monday the oil price rallied, and US ten-year treasury prices were little moved, despite the amount of risk being removed from the table. It does feel that the magical 3% won’t be found soon for the 10-year treasury. At other times of risk being taken away, the yen tends to rally against the US dollar, again overnight the yen lost ground to the US dollar.
We did mention the recent weakness in Bitcoin and the possibility that it, despite what investors and individuals alike think of it, may become an indicator of risk appetite. Even though there is no historical correlation between the two. Recently this has changed, and the Bitcoin has appeared a bit of a lead indicator of risk appetite.
Looking to the days ahead the G20 meeting will hopefully play down trade war tensions, which may help market sentiment. The Federal Reserve may be in the mood to further normalize interest rates but is probably still keen not to curtail economic growth. However, equity and bond markets will be hanging on every word from Mr Powell.
One piece of modest good news for the UK economy, headline inflation fell to 2.7% in February. Average earnings for the same period are expected to grow around 2.6%. This has closed the gap between wage growth and inflation back in line. This might help consumer sentiment in the coming months.