Weekly Market Update

Author : Laura Hochstetler
Date : October 13, 2018

Market Action

Global equities suffered their biggest weekly decline since February, partly because of rising US bond yields. For months, US equities have ignored macro issues such as the deepening US-China trade rift and have advanced despite typically weak seasonal patterns ahead of US midterm elections. This week, the market began to pay attention to those factors, and others, including an upside breakout in long-term interest rates. Asian markets also fared particularly badly. The Shanghai Composite fell by 5.2% on a single day to near a four-year low. Hong Kong’s Hang Seng and Tokyo’s Topix index recorded similar plunges. Click here for this week’s update on market returns.

China’s central bank pumped 750bn yuan ($108bn) into the economy by reducing the amount of cash that banks have to hold as reserves, after figures showed that investment and exports have weakened. The trade war with America, which has raised tariffs on Chinese imports, and a strong dollar have increased the pressure on policymakers to bolster growth.

The International Monetary Fund (IMF), citing trade protectionism and instability in emerging markets, downgraded its global economic growth outlook for this year and next. It now forecasts global GDP growth of 3.7% in 2018 and 2019, down from the 3.9% estimate for both years in April. Downside risks to global growth have risen in the past six months while the potential for upside surprises has receded, according to the World Economic Outlook.

Brazil-focused ETFs lept in response to the first round of Brazil’s presidential election, which saw far-right, former Army captain Jair Bolsonaro take nearly half the votes. The closest second, Fernando Haddad, received 29% of the vote, due to his Workers’ Party’s tarnished image following a graft scandal and Brazil’s deepest recession during its tenure in power. A second round of voting will take place on October 28.

The government of Pakistan turned to the IMF for a loan to help ease a balance-of-payments crisis. Imran Khan, the prime minister of two months, had previously suggested that his government would be able to borrow from “friendly countries” instead.

What could affect markets in the week ahead?

Last week the S&P 500 lost more than 5% in two days, the Nasdaq’s fall on Wednesday was its biggest since 2011, China’s slide took its stocks 30% off January peaks, and Taiwan’s stock futures suffered their worst day since 2000. The million (or trillion) dollar question now is: is this the major correction many people have been flagging for months, if not years? Or not? The coming week may show.

Sterling has strengthened 2% versus the dollar over the last fortnight, supported by expectations that an EU leaders summit in Brussels on Oct. 18 will yield a deal on Brexit for British Prime Minister Theresa May. If the outcome is positive, investors could unwind more of their short sterling bets, setting the currency firmly on the road to recovery.

Credit rating agencies Moody’s and S&P Global have Italian sovereign debt under review for a downgrade, and both organizations are expected to render their verdicts in the second half of October. Both agencies currently rate Italy two notches above junk so any downgrade will put the euro zone’s third largest economy at greater risk of losing investment grade status and the billions of euros of fund flows that go with it. Already, Italy’s combative budget plan – which proposes running budget deficits far higher than previously agreed with the EU – has driven government bond yields to their highest in four years.