Stocks sold off sharply this week, even sizeable gains from Friday did not help in overall performance. This leaves S&P 500 index falling for the third week in a row. The growth stocks which have been leading for a long time are now losing the most. S&P 500 booked weekly loss of 4.1% with all sectors finishing in red numbers. The utilities have lost the least, -1.26% while materials and industrials losing well over 6%. The US president Donald Trump, the frequent commentator of the stock market, was fast to blame the FED. In his opinion, the US monetary authority is tightening money supply too fast and too much. Strong third-quarter results were reported from the financial sector, the banks were beating analysts expectations.
US inflation surprised to the downside. The consumer price index stayed rather flat, increased only by 0.1 in September. The annual rate fell from 2.7% to 2.3%. Inflation responds to activity with long lags. Next year’s prices are significantly influenced by this year’s activity. The current strong economic activity and tight labour market are likely to result in higher inflation in 2019. The analysts are expecting the core inflation to be running above 2.5% through 2019.
US 10 year yield decreased by 7 basis points to 3.16%. Investors were buying treasuries in order to seek shelter from the volatile equity markets. The WTI Crude oil is down 4% on the week. Market volatility helped gold to perform well on the weekly basis, regardless it stays in the negative territory year to date.
In another commentary, President Donald Trump threatened to impose tariffs on an additional $267 billion in Chinese imports. The US treasury secretary warned China. It must now leave its currency to flow freely to become more competitive in the global trade. The only move by Chinese central bank, for now, was to decrease reserve requirements for banks by 100 basis points. This change will inject additional liquidity to the Chinese banking sector. After the move, the reserve requirements ratios (RRR) will sit at 14.5% for large commercial lenders and 13.5% for smaller banks.
The International Monetary Fund released a statement in which slashed global growth prospect in 2019 to 3.7% from 3.9%. It expects that uncertainty about US and China trade, Brexit negotiation and new Nafta deal will negatively impact.
The performance of European equity benchmark Euro STOXX 600 was in line with the American counterpart. The overall market has fallen 4.64%, while all sectors finished also in negative territory. Already beaten up telecom sector lost the least, -1.56%. The largest loser was financial services, declining over 7%, followed closely by chemicals and industrials losing over 6%. Luxury stocks suffered due to the worry of lower sales figures coming from emerging markets.
The British government representatives and European Commission were close to agreeing on conditions over Brexit divorce plan which would create a temporary custom union. This controversial plan was not supported by the Eurosceptics and Democratic Union Party of Northern Ireland. Furthermore, it is still unclear how financial derivative contract will be settled after Brexit. Currently, there is 41 trillion worth of pounds outstanding. Any outages and problems in the process could lead to sizeable losses.
Investors may be worried about the slow down of the economy, in extreme cases about the coming recession. History tells us that slowdown will eventually happen, but it is too early for a panic selling and moving away from the equity markets. For now, without the clear economic catalyst, everything points out on a technical correction. Valuation-wise, the decline in the asset prices has made the valuations look attractive again. As soon as the dust settles, the recent reduction in prices can be a great opportunity for tactical buying.
The housing data will be a very important number for next week. This will be followed by retail sales. Household data should provide information about the healthiness of customer spending. FOMC minutes will give inside about the latest FED views and policy steps. In the Euroland, German ZEW business survey gives a sense
