Market in a Minute: October 8-12, 2018
by Rich and Sheila Jamison
Rising US bond yields and weakening growth fears sent global equities to their biggest weekly losses since February. The 10-year US Treasury note yield fell to 3.14% - from a 7-year high of 3.25% late-week – as investors sought “safe haven” assets amid market volatility. The CBOE Volatility Index, VIX, rose to 21.6 from 14.8 a week ago. It had reached 29 on Wednesday. Many Gulf of Mexico oil producers halted operations in anticipation of hurricane Michael. By week’s end, however, WTI crude was down $3 from the prior week to $71.30/barrel.
For the most part, US equities have ignored macro issues such as the deepening US-China trade rift for months. Stocks also have advanced despite typically weak seasonal patterns ahead of midterm elections. Last week, the market began to pay attention to those factors … and others, including an upside breakout in long-term interest rates. Higher bond yields can prompt equity investors to question future earnings and growth assumptions. This culminated in steep Wednesday-Thursday selloffs. The DJIA lost over 1,300 points on those two days. It traced another scary swoon Friday, dropping from ~400 points positive in the morning into the negative and then bouncing back to end nearly 300 points up.
President Trump blamed the Federal Reserve for last week's market slump, largely deflecting attention from the growing trade conflict with China. "I think the Fed has gone crazy," he said. Later, National Economic Council director Larry Kudlow said he thinks that Fed Chair Jerome Powell is "on target" and that the president is not dictating policy to the Fed. The vast majority of economists and others interviewed on CNBC corroborated Kudlow’s “on target” thoughts (albeit Jim Cramer beginning a notable exception). The Fed appears to be on track to raise rates again in December, with the Fed Funds futures showing about an 80% chance of a hike.
Q3’s earnings season got under way last week. Financial giants Citigroup, JPMorgan Chase and Wells Fargo reported Friday with mixed results. Citi and JPM beat bottom-line estimates, but Wells Fargo missed. We’ll see many more companies report this week.
The International Monetary Fund downgraded its global economic growth outlook for 2018 and 2019. It cited trade protectionism and uncertainties (e.g., US/China tariffs, a pending Brexit deal, and the new trilateral USMCA) and instability in emerging markets. It now sees global GDP growth of 3.7% in both years, down from April’s 3.9% estimate for both. Downside risks have risen in the past six months while the potential for upside surprises has receded. On a related note, President Trump and Chinese leader Xi Jinping have reportedly agreed to meet at next month's G-20 summit with hopes of resolving their trade conflict.
While hopes for an interim Brexit deal have grown in recent weeks, UK parliament divisions remain over how long the backstop plan to keep the UK in the EU’s customs union should last. The primary concern is the complexity of avoiding a physical border between the Republic of Ireland and Northern Ireland. The UK and EU hope to have a text that can be provisionally agreed at a summit in Brussels this week. Any deal reached will need to be ratified by the divided UK parliament.
Moody's and S&P Global have Italian sovereign debt under review for a downgrade, and both organizations are expected to render their verdicts this month. Italy is rated two notches above junk (high-yield) now. A one-notch downgrade is reportedly priced into the market at present. Italy's populist government is proposing large spending increases that have it on course for a clash with European Commission budget watchdogs. Italian yields rose to a four-and-a-half year high this week amid the renewed scrutiny from Brussels and the ratings agencies.
The People's Bank of China announced that it will reduce the reserve requirement ratio most commercial banks must hold by 1%, to 14.5%, effective this Monday. This is the fourth such cut this year. It comes amid government attempts to support the domestic economy via a variety of means, including tax cuts and infrastructure spending, to offset the economic drag from US tariffs. As noted above, a bright spot in the news was the announcement that presidents Trump and Xi Jinping will meet at the G20 summit in late November. Sure to be on the agenda is China's record trade surplus with the United States, which hit $34.13 billion in September. Meanwhile, US treasury secretary Steven Mnuchin last week warned China against employing competitive currency devaluation to improve its competitiveness.
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