Weekly Market Update

Author : Laura Hochstetler
Date : October 20, 2018

Market Action

At Blacksummit we are monitoring a few important indices in order to observe market momentum and understand possible market patterns and direction. In an effort to comprehend if we are in the process of a market rotation (e.g. from growth into value) and/or the possibility of a complete market turnaround, we are paying close attention to three measures. The first is the Russel 2000 (red line below) and we have concerns because while the rest of the indices are positive since July 1, the Russell 2000 is negative. We also believe that if the spread between junk bonds and the ten-year Treasury (blue line below) begins rising at the same time as the Russell 2000 is dropping, an inflection point may be occurring which could signify either rotation away from growth toward value or reversal of market momentum.

As the graph above shows, the convergence that is taking place might signify a market reversal. At the same time, the difference between advancing and declining stocks seems to have taken a decisively negative turn as shown below. We plan to keep our readers updated regarding these figures on a regular basis.

So little progress was made at this week’s summit between EU-27 leaders and the United Kingdom’s prime minister that a meeting to advance the negotiations scheduled for November was postponed until December. Additionally, British prime minister Theresa May seems to be adopting the EU’s idea of extending to the end of 2021 the transition period following the UK’s formal exit from the European Union on 29 March 2019. This was met with indignation from Brexit supporters in May’s own Conservative Party, citing the lack of new ideas justifying the delay.

In a sign that international investor confidence may be returning, the Turkish government sold $2 billion worth of five-year bonds this week, its first bond issue since the country’s debt fell sharply earlier this year amid a plunge in the lira. The deal was three times oversubscribed and offered investors a 7.5% yield.

China’s economy downshifted slightly in the third quarter, according to government figures. Growth slowed to a 6.5% annual pace last quarter, compared with a 6.7% rate in Q2. However, private sector growth estimates suggest the slowdown has been much more severe, with the economy expanding at only a 4% pace. Further government stimulus efforts are expected in reaction to the economic deceleration, calling into question whether deleveraging will be ongoing.

America’s federal budget deficit amounted to $779bn for the fiscal year ending September 30th, an increase of 17% from the previous year and the largest since 2012. That constituted 3.9% of GDP, up from 3.5% in 2017.

Click here for this week’s update on market returns.

What could affect markets in the week ahead?

Spreads between Italian and benchmark German bonds reached their widest levels in five years this week after the EU warned that Italy’s proposed 2019 budget does not conform with rules laid out in the EU’s Stability and Growth Pact, calling the budget’s deviation from the rules “unprecedented.” Brussels has given leaders in Rome until noon on Monday to explain the discrepancies.

The possibility of the yuan weakening to the 7-per-dollar mark, last seen in 2008, hangs over China, emerging markets and global equities. The thinking so far has been that the risk of capital outflows, along the lines of what happened in 2016, would dissuade Beijing from allowing such a slide in the currency. But more recently, weak benchmark yuan/dollar fixings, a drop in the trade-weighted yuan index to below 2017 lows, and a flurry of comments and measures from policymakers reveal both a sense of panic and determination to prop up the economy. Coming on top of rising U.S. yields, Brexit and Italian politics, a 7-per-dollar yuan would add another layer of worry to world markets – the last thing investors want to see.

European companies’ Q3 earnings are a key test for a market which according to EPFR Global, has seen investors pull out almost $5 billion this week. Investors are jumpy about China’s economy, rising costs, trade wars, and lackluster eurozone growth. The coming week sees Europe’s most hated sectors – autos and banks – reporting earnings.

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