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Macroeconomics

11 October 2018

Taking the plunge 

It started on Wall Street, spread to Asia and then reached Europe. The question, of course, is whether the market selloff that started on October 10 signals the beginning of a longer-term decline or is just a short-term correction.

Observers immediately pointed to a range of reasons why markets turned lower, including the deepening US-China trade standoff, which is leading to higher materials costs, especially for tech manufacturers.

Indeed, the International Monetary Fund warned earlier in the week that such trade tensions could lead to a “sudden deterioration in risk sentiment, triggering a broad-based correction in global capital markets and a sharp tightening of global financial conditions.” 

Others point to recent and further expected interest rate increases by the US Federal Reserve, which President Donald Trump criticized as a “mistake,” adding that “the Fed has gone crazy.” 

On top of that, we see weakening economic growth (and likely earnings) trends, geopolitical stresses, emerging-market fragility and, last but not least, waning US retail investor enthusiasm, which is being impacted by rising wage inflation and higher energy and financing costs. 

Together, such factors explain why the IMF recently cut its global growth forecast to 3.7% for this year and in 2019 – down 0.2 percentage points from its last forecast – and sparked the current correction, contributing to the Dow’s 800-point drop and the single worst day for the S&P 500 since February. Indeed, 66% of all S&P 500 stocks are now trading in bear-market territory – although the index itself remains positive, primarily thanks to the strength of so-called FANG stocks.

However, Facebook, Apple, Netflix and Google – the basket of stocks that make up the FANG – suffered their worst trading day in nearly three months. Overall, the Nasdaq fell 4.1% on October 10. 

Asian markets fell sharply on the next trading day, with Shanghai and Shenzen both down 5% and the Nikkei down nearly 4%. 

Turning to Europe, year-to-date trends are worrisome. The Belgian bourse is down over 10%, the DAX 9%, and the Euro Stoxx 50 not much better at -7% YTD.

Technical analysis suggests that the global correction has not yet run its full course and that – as bulls and bears tussle for supremacy – plenty of volatility may lie ahead. 

While seeing bond yields settle somewhat lower or a dovish message from the Fed would help support the markets, neither is by any means a sure thing. 

For now, some investors are looking to US bonds, but the dollar is also slipping. While interest in the Japanese yen could rise, others are now reconsidering the outlook for gold. 

After a strong start to the year, gold has been steadily declining since April. Despite current volatility, prices are being held back by the ongoing normalization of interest rates. How that plays out in future remains to be seen.

The statements and views expressed in this article are those of KBL European Private Bankers as of the date of this article and are subject to change. This article is of a general nature and does not constitute legal, tax or investment advice. All investors should keep in mind that past performance is no indication of future performance, and that the value of investments may go up or down.