Weekly Market Update

Author : Laura Hochstetler
Date : October 27, 2018

Market Action

Stock market gains have largely been eliminated for the year, indexes are in correction territory, and several S&P sectors – namely Communication Services, Energy, Financials, and Materials – have declined 10-15% in the last three months as shown on the SPDR Sector Tracker. On Friday morning the S&P 500 and Nasdaq Composite Indexes joined the small-cap US benchmarks in correction territory (down more than 10% from recent peaks). The narrowly focused Dow Jones Industrial Average avoided a correction and held up best for the week, but the Nasdaq was the sole major US benchmark to end Friday still ahead for the year to date.

Yields on the US 10-year Treasury note declined 12 basis points to 3.09%. The price of a barrel of WTI crude oil declined 1.94% to $67.78, with the price slipping below the 200-day average after Saudi Arabia pledged to increase production. Gold increased to $1,235.80. The CBOE Volatility Index (VIX) reached a new multi-month high.

China’s main stock market indexes posted a weekly gain, but the yuan flirted with a 10-year low against the US dollar on Friday, as trade tensions stoked bearish bets against the currency. More weakness in the yuan could spark large capital outflows that would be a destabilizing factor in China’s economy. China’s stock market gains this week came one week after the Shanghai Composite Index and CSI 300 sank to their lowest levels in four years and two years, respectively, amid signs of slowing domestic growth and the trade impasse with the US.

In Japan, the Nikkei 225 Stock Average closed the week 6% lower at 21,184.60 and down 6.9% for the year to date. The broad-based TOPIX Index and the TOPIX Small Index also tumbled for the week, putting their year-to-date returns at -12.2% and -16.0%, respectively.

Stocks in Europe fell throughout the week in line with US markets and as Italy’s budget row with the EU grew more heated. The pan-European STOXX 600 Index fell more than 2%, and indexes in Germany, Italy, and the UK all lost ground. France’s CAC 40 lost 2.4%, led by a decline in auto-parts maker Valeo, which cut its sales and earnings targets, adding to concern that the trade spats with the US are affecting businesses.

Earnings reports for the third quarter have been solid so far, but topline growth has slowed to 7.4% from last quarter’s 10% year-over-year growth rate. The revenue slowdown, combined with an increasing number of reports from companies that they are facing challenges from US and Chinese tariffs, rising wage and transportation costs, and headwinds from a rising dollar, are making investors increasingly nervous that companies’ earnings have peaked for this cycle. The selloff in recent weeks has derated valuations, reflecting lowered expectations ahead. While somewhat slower than last quarter’s pace, Q3 earnings are still running around 22.5% above year-ago levels.

A sharp deceleration in the Markit eurozone composite purchasing managers’ index in October stood in sharp contrast to the US version of the same report, which showed a faster pace of growth this month. The eurozone index dropped sharply, to 52.7 in October, a 25-month low, from 54.1 in September. In contrast, the US composite rose to 54.8, up from 53.9 in September.

The US is refusing to resume trade talks with China until Beijing comes up with a formal proposal to address Washington’s concerns about forced technology transfer, intellectual property theft and other economic issues, The Wall Street Journal reported on Thursday. US president Donald Trump and China’s Xi Jinping are set to meet on the sidelines of the G20 Summit in Buenos Aires in late November but are unlikely to have a detailed trade discussion, the paper reported.

Economists expected US Q3 GDP to moderate after coming off a Q2 growth rate of 4.2%, and the pace did slow a bit, but not as much as forecast, with an advance reading of GDP for the quarter showing the economy expanded at a 3.5% pace, faster than the 3.3% consensus forecast. The report showed that while consumer spending was strong last quarter, business investment slowed dramatically.

In his first public remarks about the Khashoggi case, Saudi Crown Prince Mohammed bin Salman called the killing “hideous” and struck a conciliatory tone with Turkey, but the backlash may still pose a threat to investment in the kingdom. Adding to the concerns, a new IEA report said Riyadh has no choice but to diversify its economy as the challenges it faces will deepen even if oil prices remain elevated.

Click here for this week’s updated market returns table.

What could affect markets in the week ahead?

Brazilian investors are anticipating that Jair Bolsonaro – given his strong showing in the first-round of the presidential election on October 7 – will win the runoff election this Sunday, October 28. Despite deep losses in various world markets, Brazilian stocks rose for the week; the Bovespa index returned more than 1% this week, and is up more than 20% since recent lows in June.

To date, almost half (48%) of the companies in the S&P 500 have reported earnings for the third quarter – and in the upcoming week, 139 S&P 500 companies (including 6 Dow 30 components) are scheduled to report. Facebook, Ebay, and Apple are among the companies scheduled to report next week.

What happens with Brexit is still anyone’s guess, but UK finance minister Philip Hammond will have to stand up on Monday and give his best approximation of a budget. Bank of England Governor Mark Carney faces a similar problem on Thursday. The central bank is expected to keep interest rates on hold and say it is sticking to its plan to raise them gradually. But that is also assuming Britain gets a Brexit deal and for both Hammond and Carney that is still a big unknown.

Next week will bring a heavy release of eurozone data. On Tuesday will come the first reading of Q3 GDP and the main economic sentiment survey for the eurozone, and on Wednesday there will be key inflation numbers. Together they will show just how much of an impact the trade war and stock market stresses are having on the economy.

Next week’s US non-farm payrolls report is expected to show a rebound in job creation after the unexpected slowdown in September, with headline employment growth estimated at 190,000. Unemployment is expected to hold near a 50-year low too but what could especially draw attention is worker pay, which has long lagged the recovery in outright US employment.