Summer time blues for equities

Equity markets were hit by the perfect storm on Monday, having largely ignored the news headlines in the past weeks, at some point there had to be a reckoning. Equity markets in Europe gave up all of Friday's gains and some extra, the Vix fear gauge rose over 30% at one stage. As we referred to in Monday’s piece, the rise on Friday was a largely unexplained one and seemed a little illogical.

A combination of the continued on-going trade fears, the US yield curve flattening even further and the Bank for International Settlements warning at the potential impact rising rates will have on global debt, which has spiralled to record levels, all contributing.

China announced it was lowering the banks’ reserve requirement, releasing 100 bn dollars of liquidity may be interpreted as a negative sign, as it may lead to questions on China growth explaining the rationale for the cut. The Chinese equity market has fallen 20% from its high this year, the definition of a bear market. Growth stocks took the brunt of the fall, as they had taken the lead on the way up. On the positive side, the flattening curve was more as a result of the shorter end rising than the longer end falling.

US ten-year treasury yields continue to fail to break the 3% level, that many predict is only a matter of time. We would suggest this is related to yields in the equivalent German Bunds. Whilst they continue to hover close to zero this must cap the upside for US treasury yields. However, this argument has not stopped yields on the 2-year treasury rising this year.

Markets in Europe calmed on Tuesday, technical analysts suggest around 2675 is the area for support for the S&P 500, and that it is not yet time to press the panic button, particularly whilst that level holds. Summers can be fun times, particularly as we enter the various summer activities, Wimbledon and Henley to name but two. Traders want the books flat during these times which can lead to increased volatility as Friday and Monday proved.

As the current economic data is not suggesting an economic recession is imminent, equities may remain volatile but that would suggest, if history is a guide, this may be part of the earlier year correction. Thursday will see Europe and Brexit back into the headlines as the euro area finance ministers meet to discuss further reforms to the euro area finance.

Posted on June 26, 2018 .