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29 October 2018

Tough Times for Equities 

Equity markets were under pressure last week, for the fourth time in five weeks, as underwhelming corporate earnings results sparked concerns of slower economic growth.

This was despite stronger than expected GDP growth on Friday. US GDP came in at 3.5% annualised. The S&P 500 has now fallen by 10% from recent highs and has now posted weekly losses of nearly 4% in two out of the last three weeks. All sectors posted losses for the week, with energy, industrials, and financials leading markets lower. While the US earnings season has produced the highest levels of growth since late 2010 with earnings beat rates and magnitudes ahead of five-year averages, results have not been strong enough to push aside mounting investor fears.

These range from peak margins on higher input costs, the strong dollar, waning benefits from tax reform, decelerating Chinese growth, potential destabilisation from Italy budget crisis, weak housing market, trade-war fears, and worries about a possible Fed policy mistake. It was against this backdrop that global government bond yields have started to fall from their more recent highs, the US 10-year yield has fallen back to the 3% level, having been as high as 3.2% earlier in the month.

Looking forward, politics continues to be at the centre of news. Over the weekend German Chancellor Merkel suffered another political setback, with the results from the state election in Hesse (home of Frankfurt) where minor parties made big gains. Merkel suffered a similar voter backlash in Bavarian elections two weeks ago, and continuing a trend of populist parties making gains throughout Europe.

It’s not all negative news in Europe this morning though, markets are higher and Italian assets are bouncing off their lows in early trading, which is being supported by S&P affirming Italy's BBB rating, but cutting their outlook to negative. In the UK today, the Budget will be released – which will give an update on how the Office for Budget Responsibility is viewing the UK economy amid the uncertainties of Brexit negotiations.