US and Global equities have experienced significant volatility and downward pressure over the past 2 months with the US S&P 500 down over 10% from the September 21 all-time high. Technology stocks – which have led the market up over the past few years – have fallen even further with Apple (-20%) and Amazon (-21%).Whereas disappointing technology company financial results have not helped, it is the underlying stock market concern which has led all stocks lower, this despite the US economy growing at an annualised rate of 3.5% in the third quarter.
Reasons for the stock market fall:
After 9 years of extraordinary US expansion there is a growing belief that the US economic cycle is peaking.Indeed, Goldman Sachs have just announced/quantified a 23% risk the US economy moves into recession over next couple of years.
Doubts about future US global economic growth comes as the Federal Reserve continues to raise interest rates. The key ‘Fed Funds’ rates has risen by 3 x 0.25% this year to 2.0-2.25%. A further rate hike is expected in December and 3 x 0.25% rate rises are expected in 2019, although if stocks fall further the Fed might need to be less aggressive on 2019 rate rises.
Global growth prospects are also negatively affected by US-China trade tensions with the President of the US and China due to meet at the G20 summit in Argentina which starts at the end of this week. Any trade talk news will have an immediate market impact.
European stock markets also have additional worries over Italy’s war-of-words with the EU over its proposed breach of annual budget deficit plans i.e.Italy proposing -2.4% versus EU member -2.0% limits. Brexit further adds to European investor uncertainty.
Rising interest rates and bond yields have been major factors unsettling markets with the yield on the benchmark US 10-year Treasury Bond rising from 2.50% at the start of 2018 to over 3.20% a month ago. Ironically, as stocks have sold off, investors flee to safer financial assets and buy bonds accordingly. As bond prices go up/ yields down, the yields on the US 10-year has fallen to 3.05%. Similarly yields have fallen in all global bond markets as global stocks prices fall.
Six weeks ago oil was at a 4-year high at $80 per barrel due to supply being limited via
- The 2-year OPEC/Russia agreement limited the amount of oil coming on to the market still being intact.
- President Trump’s economic sanctions against Iran removing 1 million barrels a day from the market.
Now the market is focused on supply: With US and global growth prospects seriously being questioned oil has fallen sharply to $60 per barrel.How OPEC/Russia respond will be interesting.
S&P 500: 2632
FTSE 100: 7000
Bonds – 10 Year Government Yields
EUR/USD 1.1400 (1 euro buys 1.1400 dollars)
GBP/USD 1.2800 (1 pound buys 1.2800 dollars)
OIL: Brent: 60.00 (dollars per barrel)
GOLD: 1220 (dollars per ounce)
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