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Macro

GUOSEN Closing Bell (October 18)


MARKET

Chinese market refreshed 4 years low and SHCOMP lost 2500 critical level. No sectors gained, while Oil and Coal stocks were the worst performers. Combined turnover for both markets was CNY 235 bn, down 9.03% dod.

 

 

Close

% Change

Vol (bn CNY)

%YTD

Shanghai

2486.42

-2.94

106.58

-24.82

Shenzhen

7187.49

-2.41

133.10

-34.90

CSI 300

3044.39

-2.37

79.70

-24.47

ChiNext

1205.03

-2.18

48.62

-31.25

 

Sector

Top 1

Led by

Top 2

Led by

Upward-leading

 

 

 

 

Downward-leading

Oil

002476

Coal

600997

 

NEWS

*CSRC Said to Ask Beijing Orient Lenders Not to Force Share Sales. Chinese regulators took action to try to prevent a public company’s share pledges from jeopardizing its stability, according to people familiar with the matter, as a market plunge exposes the perils of using stocks as collateral for loans. (Bloomberg)

*HSBC is on track to become the first foreign company to trade on a Chinese bourse under plans by a new stock exchange link between London and Shanghai. In a move that has been in the making for more than a decade, the London-Shanghai stock connect plans to make the bank the first offering of Chinese Depositary Receipts — a tradeable security that reflects underlying shares listed elsewhere. (Financial Times)

 

FUND FLOW

Click here for more information about Guosen.

This article is from Guosen Securities Co., Ltd. and is being posted with Guosen Securities Co., Ltd.’s permission. The views expressed in this article are solely those of the author and/or Guosen Securities Co., Ltd. and IB is not endorsing or recommending any investment or trading discussed in the article. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

 


21041




Futures

Blue Line Futures - Midday Market Minute (10.18.18)


Gold rallies as it stocks tumble.

Futures trading involves substantial risk of loss and may not be suitable for all investors. Trading advice is based on information taken from trade and statistical services and other sources Blue Line Futures, LLC believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder. Past performance is not necessarily indicative of future results.

Visit our website at www.bluelinefutures.com to open an account and stay up to date with our research.

Bill Baruch is President and founder of Blue Line Futures. Bill has more than a decade of trading experience. Working with clients he focuses on developing trading strategies that present a clear objective for both long and short-term trading approaches. He believes that in order to properly execute a trading strategy, there must be a well-balanced approach to risk and reward.

Prior to Blue Line, Bill was the Chief Market Strategist at iiTRADER which followed running a trade desk at Lind Waldock and MF Global.

Bill is a featured expert on CNBC, Bloomberg and the Wall Street Journal as well as other top tier publications. 

Blue Line Futures is a leading futures and commodities brokerage firm located at the Chicago Board of Trade. We work with clients that range from institutional to professional to novice and from self-directed to broker-assisted. No matter what type of trader you are, our mission is simple; to put the client first. This means bringing YOU strong customer service, consistent and reliable research and state of the art technology. 

Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from Blue Line Futures and is being posted with Blue Line Futures’ permission. The views expressed in this material are solely those of the author and/or Blue Line Futures and IBKR is not endorsing or recommending any investment or trading discussed in this material. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


21033




Macro

Validea - Beware of Binary Market Indicators


Whenever the market declines, the news is filled with information that can lead investors to panic. That is no surprise since doom and gloom sells. Even with the small pullback we have recently had (we can’t even call it a correction since the market hasn’t declined 10%), there has been no shortage of negative headlines and calls for impending doom.

I have previously written about the dangers of letting these headlines play any role in your investment strategy, so I won’t cover that here, but another tool that I am seeing used more and more is the binary market sell indicator.

The binary indicator is very alluring for investors because it offers up exactly what they want. It provides the hope that there is a way to know exactly when to sell to avoid corrections or bear markets and when to get back in after. It is essentially the holy grail of investing.

The problem, of course, is it doesn’t exist.

There are many of these types of indicators you will see in the media during market declines. Some will use valuations. Some will use technical analysis. Some will use investor sentiment. Others will use more indirect things like the slope of the yield curve.

But none of them will offer the one thing many who discuss them seem to promise – the ability to predict the next major market decline in advance.

Below are some of the indicators I have recently seen used as predictors of a coming market decline. In each case, what the indicator actually means can vary substantially from what those who use it would make you believe.

 

Market Valuations are High

The market is clearly expensive. The median CAPE of all stocks in our database is around 34, right now. That puts in in the 78thpercentile historically.

 

The median Price/Sales shows more substantial overvaluation. It puts the market in the 90th percentile historically.

http://blog.validea.com/wp-content/uploads/2018/10/1485x990xpic2.png.pagespeed.ic.QjzSHfdnYW.png

What both of these have in common, though, is that they tell you nothing about where the market is going in the next year, and very little about where it is going in the next 3-5 years. Valuations can be very good predictors of returns over the next decade, but they are useless for predicting short-term returns. To illustrate that, just think about the bull market of the late 90s and the one we are currently in. In both cases, valuations got very high, and stayed there for a long time. Investors trying to use those valuations to time the market missed substantial gains.

 

We Just Broke Below the 200 Day Moving Average

Trend following can be a very successful investment strategy for many investors. It produces similar returns to buy and hold over the long-term, but does so with smaller drawdowns and less volatility. The strategy essentially calls for selling stocks when they fall below a specific moving average and buying them back when it moves back above it. Trends can be very powerful in the market, and this strategy allows investors to stay on the correct side of the trend most of the time.

The most popular moving average used in trend following is the 200 day. As a result, the investing media watches it closely and will widely report when we fall below it. As you can see from the chart below, this occurred for the first time since 2016 in the recent market decline.

http://blog.validea.com/wp-content/uploads/2018/10/1504x708xpic3.png.pagespeed.ic.Iex26aBny7.png

To put this in context, though, it is important to understand what this signal means, and what it does not.

The goal of a long-term trend following strategy is to try to avoid major market declines. The price you pay for doing that is a bunch of false signals along the way. In fact, when the S&P 500 breaks below its 200-day moving average, it produces gains more often than it produces losses. The strategy makes up for that fact through huge loss savings in bear markets. So a series of small incorrect signals are offset by a few very large correct ones.

For example, most trend following systems got the 2008 decline right and made it through that bear market with minimal or no losses. Since then, however, essentially every break below the 200-day moving average has been a buying opportunity.

A trend following strategy using an indicator like the 200-day moving average should be looked at as a long-term strategy. Using the indicator outside of the total strategy to try to predict individual market declines is not supported by the data.

 

Sentiment Has Gotten Too Positive

Sentiment is very similar to valuations. It is true that when it gets too positive, it is a bad long-term sign for the market, but it offers no value in predicting what will happen in the short-term.

Nick Maggiulli of Ritholtz Wealth Management wrote an excellent post on this topic. He looked at investors’ average allocation to equities over time and developed a strategy that moved into bonds when sentiment was too positive (investors had more than 70% of their portfolios in equities) and invested in stocks when sentiment was too negative (investors had less than 50% of their portfolios in equities). He found that strategy outperformed buy and hold by a wide margin. He also found that the portfolio would have been essentially impossible to follow for most investors.

Looking at the results of the strategy during the dotcom bubble, he observed the following

As you can see, the model moved to bonds in September 1996 and didn’t get back into stocks until October 2002!  Though it outperformed in the end, at what psychological cost?  Can you imagine how hard it would be to sit in bonds for 4 years while your friends (some of them dumber than you) got rich along the way?  It would be near impossible.  The same thing happened in the GFC when this model signaled to get out of stocks in May 2006 and get back in during November 2008.  Yes, this also outperformed “Buy and Hold” over that period, but who could’ve waited it out?

http://blog.validea.com/wp-content/uploads/2018/10/1380x882xpic4.png.pagespeed.ic.zeEvPnWkD_.png

https://ofdollarsanddata.com/why-the-best-predictor-of-future-stock-market-returns-is-useless/

As Nick notes in the article, this indicator just recently turned negative. But like the late 90s, it could be negative for a really long time before we actually get a significant decline. The signal is therefore not very useful for predicting the next market decline.

 

The Yield Curve is Close to Inverting

The yield curve is probably the best predictor of recessions we have. That isn’t to say it is good because it doesn’t give you much information on timing, but when the yield curve inverts, we do typically get a recession in the next couple of years.

The yield curve being flat (or close to inverting) like it is now is not a signal at all. It is not useful in predicting a potential recession. In fact, a BMO study found that the stock market tends to do better than average when the yield curve is flattening.

 

https://www.marketwatch.com/story/why-stock-market-investors-should-stop-freaking-out-about-the-yield-curve-2018-06-28

And even if the yield curve does invert, it doesn’t give you much information about if and when the market will decline. Although a decline in the stock market does tend to eventually follow a yield curve inversion, the BMO study found that stocks typically maintain or extend their gains in the year following it.

The Challenges of Short-Term Market Timing

The stock market is going to have a significant decline at some point. We could be at the start of it now or it could still be years in the future. It is tempting to try to time when that decline will come, and simple indicators are often used to do it. Investing is far from simple, though, and short-term market timing is not a winning strategy. Some of the biggest mistakes investors make occur in trying to predict when the market will fall. Accepting that isn’t possible may be one of the best things you can do for your portfolio.

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Validea.com is an independent research firm offering stock analysis, screens and model portfolios based on the strategies of great investors. Our model portfolios select value, dividend and growth stocks based on our interpretation of the strategies of market legends, including Warren Buffett, Peter Lynch, Benjamin Graham, Kenneth Fisher, Martin Zweig, David Dreman, Joseph Piotroski and Joel Greenblatt. Interactive Brokers customers may sign up for a free trial in Account Management. Readers who are not customers of Interactive Brokers may click the following link to sign up for a risk-free trial.

Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from Validea and is being posted with Validea’s permission.The views expressed in this material are solely those of the author and/or Validea and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

 


21032




Macro

Franklin Templeton - Not All Emerging Markets Are Equal - By Manraj Sekhon & Chetan Sehgal


Trade talks, country-specific concerns and a stronger US dollar created a challenging backdrop for emerging markets in the third quarter, but Manraj Sekhon, CIO of Franklin Templeton Emerging Markets Equity, and Chetan Sehgal, senior managing director and director of portfolio management, are looking beyond the noise of negative headlines. They highlight the effects of a growing disconnect between the negative sentiment permeating the market and positive emerging-market equity fundamentals, and present the team’s overview of the emerging-markets universe in the third quarter of 2018.

 

Three Things We’re Thinking About Today

  1. The US Federal Reserve (Fed) raised its key interest rate by 25 basis points in September, its third increase in 2018, and in line with market expectations. The Fed is widely expected to raise the rate again in December and another three times in 2019. While some investors worry that rising US interest rates could hurt emerging markets, we found that previous tightening cycles did not lead to a long-term downward trend. In fact, since rates were first raised in December 2015, emerging-market (EM) stocks, as represented by the MSCI Emerging Markets Index, have risen over 40% cumulatively in US-dollar terms.1
  2. An escalation in the trade dispute between the United States and China resulted in several rounds of tit-for-tat tariffs in recent months. Trade tariffs upon China have come at a challenging time, when its labor-cost advantage is fading and it is embarking upon the process of deleveraging. However, we believe supply-side reforms and deleveraging could help ease structural risks. Meanwhile, a shift towards innovation, technology and consumption as primary drivers of growth supports improved earnings sustainability. Corporate results have also been encouraging, with many companies not just reporting improved operating and financial performance, but also proposing to pay out a higher portion of earnings to shareholders.
  3. The passage of two key laws required for the 2019 general elections and a solid macroeconomic environment made Thailand one of the best-performing emerging markets over the quarter. The economy grew by a faster-than-expected 4.6% year-on-year in the second quarter,2 inflation remained well under control despite the rise in oil prices, and interest rates are close to record lows. A current account surplus and large foreign reserves supported the Thai baht. While Thailand’s market trades at a premium to its EM peers, we can still find stocks at attractive valuations. We believe major domestic banks are key beneficiaries of Thailand’s economic recovery and appear attractively valued to us. Retail companies are another area of interest as they stand to benefit from the rise in consumption ahead of the elections.

Outlook

In the last decade, China has surpassed the United States to become a far more important export market for most large emerging economies, mainly due to its burgeoning consumer market. Thus, trade growth now predominantly comes from intra-EM demand. Rising protectionism in the West may further pivot focus towards regional agreements. Indeed, China appears eager to replace US trade leadership in Asia.

In emerging markets in general, we continue to like themes such as the structural growth in the technology sector, rising consumption and economic reforms. Technology is reshaping the global economy. While emerging markets were once disadvantaged by poor infrastructure, digitalization and new technologies have enabled emerging markets to address development challenges and leapfrog technological change.

We aim to look beyond the “noise” of negative news headlines and instead focus on the underlying fundamentals of the EM asset class. We find a disconnect between the negative sentiment permeating the market and positive EM equity fundamentals, including rising cash flows, improving capital-allocation discipline, corporate deleveraging, healthy earnings and discounted valuations.

Not all emerging markets will be hurt by the same factors, and performances of individual emerging markets vary considerably. As stock pickers, we can choose among the varied opportunities that emerging markets offer to build well-diversified portfolios that seek to avoid excessive risks.

Emerging Markets Key Trends and Developments

EM equities began the third quarter on a strong footing but ended the period lower. Mixed news on trade talks, country-specific concerns and a stronger US dollar created a challenging backdrop for emerging markets. Conversely, developed-market stocks advanced. The MSCI Emerging Markets Index fell 0.9% over the quarter, compared with a 5.1% gain in the MSCI World Index,3 both in US dollars.

 

The Most Important Moves in Emerging Markets This Quarter

  • Asian equities fell amid a raft of economic concerns, led lower by China, Pakistan and India. China’s deleveraging campaign and deepening trade row with the United States weighed on the outlook for its economy. Pakistan struggled with its growing current account deficit and shrinking foreign exchange reserves. India was hobbled by a decline in the rupee, a wider current account deficit and troubles in the non-bank lending industry. In contrast, stocks in Thailand, Taiwan and Malaysia were the top gainers. Thailand’s economy grew faster than expected in the second quarter and the military government took steps towards holding a general election by May next year. Taiwan benefitted from an advance in technology stocks, especially index heavyweight Taiwan Semiconductor Manufacturing Company.
  • Latin America was the best-performing region over the quarter, driven by strength in Brazil and Mexico. Brazil’s market benefitted from the growing popularity of a more market-friendly candidate in electoral polls ahead of the October elections, coupled with resilient corporate earnings, higher commodity prices and reasonable valuations. Market sentiment in Mexico was supported by easing political uncertainty following Andrés Manuel López Obrador’s victory in July’s presidential elections and a conclusion on the revised North American Free Trade Agreement (NAFTA). Canada reached an agreement late in the period to join the revised trade deal between the United States and Mexico. The accord, renamed United States-Mexico-Canada Agreement (USMCA), is expected to be signed in November. Colombia, Peru and Chile, however, recorded declines.
  • Emerging European markets, as a group, gained during the quarter, supported by a surge in September. Poland’s equities rose ahead of FTSE’s reclassification of the market from EM to developed-market status in September. Higher oil prices and attractive valuations drove stock prices in Russia. Despite a strong rebound in September, following appreciation in the lira and a sharp increase in interest rates, Turkey’s market ended the three-month period with a double-digit decline. A strong dollar and worries about a proposed land reform weighed on investor sentiment in South Africa. On the positive side, some of the more controversial requisites of the proposed reform were eased in the country’s Mining Charter.
  • Frontier markets declined, lagging their EM peers, partly due to asset class outflows. Lebanon, Nigeria and Sri Lanka were among the weakest markets, ending the quarter with double-digit declines. Nigeria was dragged down by slowing economic growth, high inflation and a decline in foreign direct investment, coupled with uncertainty ahead of the general elections in February 2019. Equity prices in Sri Lanka were impacted by a devaluation in the rupee and external debt funding concerns. Bahrain, Oman and Kuwait, however, fared better, ending the quarter with positive returns. The FTSE upgrade later this year and hopes of inclusion in the MSCI Emerging Markets Index in the future continued to drive positive sentiment in Kuwait.

 

Full Article and Regional Outlook Map (As of 30 September 2018)

1. Source: FactSet, as of September 30, 2018.The MSCI Emerging Markets Index captures large- and mid-cap representation across 24 emerging-market countries. Indexes are unmanaged and one cannot directly invest in them. MSCI makes no warranties and shall have no liability with respect to any MSCI data reproduced herein. No further redistribution or use is permitted. This report is not prepared or endorsed by MSCI. Important data provider notices and terms available at www.franklintempletondatasources.com. Past performance is not an indicator or guarantee of future performance.

2. Thailand’s National Economic and Social Development Board, August 2018.

3. Source: Factset. The MSCI Emerging Markets Index captures large- and mid-cap representation across 24 emerging-market countries. The MSCI World Index captures large- and mid-cap performance across 23 developed markets. Indexes are unmanaged and one cannot directly invest in them. Past performance is not an indicator or guarantee of future performance. MSCI makes no warranties and shall have no liability with respect to any MSCI data reproduced herein. No further redistribution or use is permitted. This report is not prepared or endorsed by MSCI. Important data provider notices and terms available at www.franklintempletondatasources.com.

--

Originally Posted on October 11, 2018

CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

The comments, opinions and analyses expressed herein are solely the views of the author(s), are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.

 

Important Legal Information

All investments involve risks, including the possible loss of principal. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in emerging markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with emerging markets are magnified in frontier markets. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions.

The comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.

This information is intended for US residents only.

What Are the Risks?

All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments.

To get insights from Franklin Templeton delivered to your inbox, subscribe to the Beyond Bulls & Bears blog.

Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from Franklin Templeton and is being posted with Franklin Templeton’s permission. The views expressed in this material are solely those of the author and/or Franklin Templeton and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


21031




Stocks

Invesco - Will The Global Stock Sell-Off Continue?


It was yet another week in which I felt like we lived 100 weeks. Of course the biggest event was the stock market sell-off. US stocks led what became a global sell-off, which slowed and actually began to reverse on Friday. The key question on investors’ minds is: Is this over? Or will stocks lose more ground? Before we can gauge the likelihood of this sell-off continuing, we must understand its origins. There were two catalysts for the stock market drop — and they are the two key risks I have been warning about for more than a year: US Federal Reserve (Fed) normalization and trade.

Fed sparks concerns with seemingly hawkish comments

Recall that stocks began losing ground before the past week’s selloff as the yield on the 10-year US Treasury spiked. This spike was precipitated by comments from Fed Chair Jay Powell early in the month that were perceived as hawkish. Powell posited that “we are a long way from neutral at this point,” which came as a surprise because many assume we are getting close to neutral.

While I do not believe that the Fed is “going loco” (to quote recent criticism from US President Donald Trump), I do believe Powell could have chosen his words better in suggesting the Fed has a lot more tightening before it reaches neutral. But that’s missing the big picture, which is that, in my view, Fed policy is inherently dangerous because the Fed is operating two levers at once: raising the fed funds rate and normalizing the Fed’s balance sheet at an accelerating pace.

Fed policy was also discussed at the recent International Monetary Fund (IMF) meeting — particularly vis a vis its negative impact on emerging markets. Recall that back in early June, the governor of the Reserve Bank of India, Urjit Patel, sounded a warning bell regarding the Fed and its impact on emerging markets in a Financial Times op-ed piece. Since then, the situation for emerging markets has only worsened because of rising rates and the stronger US dollar — as well as country-specific issues. The Fed’s response to this is a simple one; as the Fed’s Vice Chairman for Supervision Randal Quarles explained, “the right response is for us to be as predictable, gradual” about policy as possible.

IMF warns of the impact of trade wars

The more immediate catalyst for the sell-off was that the downside of trade wars became tangible last week. It started with the IMF’s release of its World Economic Outlook. The IMF downgraded growth estimates not just for China but for the US — and not just for the longer term but for next year.

The IMF believes the tariffs that have thus far been implemented are already having a negative impact on growth — and it forecasts that a full-blown trade war could push global growth down more than 0.8 percentage points in 2020. As IMF Chief Economist Maurice Obstfeld explained, “There are clouds on the horizon. Growth has proven to be less balanced than we had hoped. Not only have some downside risks we identified in the last WEO (World Economic Outlook) been realized, the likelihood of further negative shocks to our growth forecast has risen.” Moreover, this was a very pessimistic IMF meeting, with many who attended sounding the alarm on trends, such as de-globalization, that are threatening global growth.

More volatility ahead?

These risks have been growing for some time, and so I don’t expect them to go away overnight. Therefore I don’t believe the sell-off is over. I expect increased volatility to continue, especially downside volatility. However, I also expect earnings to provide a powerful source of support to stocks. In addition, the yield on the 10-year US Treasury has moved down substantially, taking pressure off stocks. In other words, I believe the sell-off will be relatively short-lived and resemble the February sell-off, unless one of the two key risks I discussed accelerates dramatically. In this environment, I believe that skilled active managers can play defense on the downside and take advantage of opportunities as they arise.

Four things to watch this week

Beyond the sell-off, there is a lot going on in the coming week that we will need to pay attention to, including:

  1. Italian bond yields. The Italian 10-year bond yield rose to 3.57% from 3.42% over the past week, as Italy moved forward with plans to spend more in the next several years than allowed by the European Union (EU).1 The EU has made it clear that this puts Italy in breach of EU covenants.At the same time, the yield on the German bund fell to 0.50%, despite some geopolitical stress created by the election in Bavaria.1 That election is has starkly illustrated the drop in support for the Christian Social Union (CSU), which in turn would suggest an erosion in support for German Chancellor Angela Merkel. The spread between the Italian 10-year and the German 10-year has widened so much that it is concerning. We will want to see how the EU handles this lack of fiscal discipline from Italy, as it could precipitate a move by Italy to leave the EU — or at least fray ties even more. I wouldn’t be surprised to see Italian bond yields rise further in this environment as uncertainty grows.
  2. EU summit. The European Union will hold a summit this week, and has been working furiously with the UK in order to arrive at an outline of a Brexit agreement by the summit — although it looks like it will not have an agreement outline by then. This calls into question the rest of the timeline. The goal was to then refine the outline following the summit, and come to a legally binding agreement at the November summit. We will want to follow the situation closely, including whether the EU and UK extend the post-Brexit transition period, which would allow both sides more time to negotiate the terms of a post-Brexit trade relationship. This only adds to geopolitical stress and economic policy uncertainty.
  3. US Treasury biannual report. US Treasury Secretary Steve Mnuchin is expected to release a Treasury Department report that will include an assessment of foreign currencies. There are some worries that the US will label China as a currency manipulator in this report — despite leaks from the US Treasury that China is not manipulating its currency. If the report does this, it will only intensify tensions between the US and China.
  4. Third quarter corporate earnings season has begun, and I expect them to be very good overall. However, more than actual earnings, I care about what companies will be messaging about the future. Recall that last week we heard from several companies, including Fastenal, which shared that the tariff conflict is already disrupting its global supply chain. Therefore, I will be particularly focused on what companies have to say about trade tensions and their impact on earnings.

 

1 Source: Bloomberg, L.P., as of Oct. 12, 2018

 

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The opinions referenced above are those of Kristina Hooper as of Oct. 15, 2018. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

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This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial advisor/financial consultant before making any investment decisions. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

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Will The Global Stock Sell-Off Continue? By Invesco US

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