The month ended rather as it started with equity markets under pressure. A mixture of weak Chinese data, disappointing US durable goods orders along with Jay Powell’s first testimony possibly being slightly more hawkish than investors might have expected combining to hit sentiment. The FTSE 100, along with most developed markets, lost circa 4% in the month of February. Last month has a history of not being a good one for equity investors, averaging a 2% fall historically. March and April tend to be more favorable. The FTSE 100 has been the worst performing of the major developed and undeveloped markets year to date. High yield credit spreads have widened adding to the gloom. As a Barons headline quoted, the shortest month of the year felt a very long one.
The cause for jitters at the start of the month was the fear that treasury yields were likely to rise sharply. The ten-year US treasury yield came close to 3% at one point in February, however it has now retreated closer to 2.8% at the end of the month. The S&P 5OO corrected about 10% from the highs before recovering some of those losses, and currently stands about 6% below where it was at the peak in January. Latterly recent economic data from the US suggested growth has softened modestly in the first quarter of 2018. Thursday’s Institute for Supply Managers manufacturing survey results for February was more encouraging.
Having spent many months close to historic lows, the Vix index jumped to life in February. The move probably exaggerated by the unwinding of positions in a new structured product allowing market professionals to sell short volatility at historic lows.
We did bring some analogies to how the equity markets were trading ahead of the correction in 1987 and today. Selling market volatility in a low volatility environment was a feature of 1987, and as today the correction was swift. The difference has been so far that the correction to date has nothing as severe.
When one tries to analyse what is going on when capital markets move it can often just be a change of sentiment. Donald Trump’s tax reforms appears now to be the catalyst for the fear in equities to turn to greed. That can often all it takes, when the wall of fear collapses so can the equity market. There had to be a correction at some point, and we reached that point in February. Timing is always hard to find.