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Market commentary for week ending 2018-10-21

US benchmark index S&P 500 finished flat this week. Looking deeper into mixed results of the sector decomposition, we can conclude that risk off is still going on. Defensive sectors outperformed heavily, leading with consumer staples up 4.3% and utilities up 3.1%. Cyclicals sold off, with consumer discretionary as biggest loser down 2%, energy down 1.9% and materials down 1.4%. Investors continue to sell the growth-oriented stocks and shift into value stocks. Overall the economy is in a good shape. It seems that markets are just going through the turbulent times. With rising yields, bonds declined as well. US Dollar strengthens up, US Dollar index risen to 95.46 points.

US retailer Sears holdings filed for Chapter 11 bankruptcy. It was not a surprise to the market as the corporate fundamentals as well as the stock price gradually deteriorated.
US Retail sales for September stay flat. Update from the September FOMC meeting in form of released minutes showed that central bankers believe in a gradual rate hike. The probability of December rate hike remains high, currently sits around 83%.

US housing starts fall more than expected in September. On an annual rate, housing starts fell 5.3%. Particularly in the south, which accounts for the bulk of homebuilding. The data was the most likely impacted by hurricane Florence which hit North and South Carolina in mid-September. Building permits fell 0.6%. This was the second straight monthly decline in permits. Higher affordability of housing combined with the rising mortgage rates challenges the housing market.
The data negatively impacted home builders, where equities from this sector continue to plummet.

European equities finished slightly more positive, increased by 0.64%. Sector-wise, the story is similar to the US. Real estate, healthcare and Utilities leading meanwhile autos, construction and banks lagging.

The ZEW Institute’s sentiment index data were released. Analysts’ expectations for the German and Eurozone economies fell sharply in October. Expectations for the German economy fell to -14.1 from +3.1 previous month. Eurozone numbers dropped to -12.2 from +3.9 previous month. These numbers show that the analysts are concerned about the economy. German political problems of Chancellor Angela Merkel and the budget fight Italy vs. European Commission driving the sentiment.

The emerging market equities have declined by 25% from January high. For the duration and magnitude of the selloff, it seems that this is a bear market rather than a correction.
China reported 6.5% year-over-year GDP growth, less than the prior quarter’s growth of 6.7% and less than the expected growth of 6.6%. An unease in the international trade is biting back.

Geopolitical issues continue to influence global affairs. The controversy over the disappearance of journalist Jamal Khashoggi is increasing the pressure on Saudi Arabia and its relationship with the rest of the world. US Treasury Secretary Steven Mnuchin had to pull out from the Future Investment Initiative conference in Saudi Arabia. Business leaders are starting to distance themselves from Saudis as well. The investors in global investment giant Softbank started to feel nervous due to the close ties with the Saudis.

Next week we are going to focus on the key economic data release in form of PMIs across the world. The global PMI will hint whether or not the global economy is going to grow in the near term. Q3 gross domestic product estimate will be another important release. In the European area, we need to watch the German Ifo survey.

October 21, 2018 - jd_admin