Thumbnail Sketch Of Six Things To Monitor This Week

We detail the six things to watch in the coming week and why: Equities, Bank of England and Bank of Japan, EMU GDP, US data, China PMI and European politics

Equities 

Global equities have sold off hard. The magnitude of the recent loss is similar to what happened earlier this year. The MSCI World Index of developed countries fell 10.5% in January-February carnage and are now off about 11% this month. The MSCI Emerging Markets Index has matched the 11% loss back at the start of the year, but never truly recovering in between. The Dow Jones Stoxx 600 fell around 9% initially but did not bottom until the following month, by which time it was off closer to 10.4% from the peak. This leg down has seen it shed roughly 9.8%. The S&P 500 fell about 11.8% in January-February’s downdraft and has slid 10.8% now. 

Most narratives seem to attribute the sell-off to the fear of a policy mistake from the Federal Reserve in raising rates too much (Trump) or suggesting it will go beyond what investors think reasonable, though some like the Fed’s own Kashkari (Minneapolis Fed President) opposed the rate hikes in the first place. Recently he penned an op-ed piece in the Wall Street Journal putting forth his argument that the Fed should pause but appears not to have persuaded his colleagues. Some see the backing up of long-term rates, which is also influenced by the increase in supply, and the deterioration in the US fiscal condition, as more significant than the rise in fed funds rate, which has been well telegraphed. Others fear a peak in earnings, which is often tied with the coming end of the economic expansion. 

We suspect the S&P 500 will bottom before these macro considerations change. Our read of the technical condition warns that while indicators are stretched, there is nothing to indicate a low is in place. A reversal pattern or at least a close above the previous day’s high is needed to begin pointing to a bottom.  

BOE and BOJ

Both the Bank of England and the Bank of Japan meet in the coming week. Neither is likely to change policy. The market response is likely to be minimal. The Bank of England is not expected to raise rates again until after next March when the UK will leave the EU. The Bank of Japan has slowed its bond purchases, made possible, arguably, by the yield-curve control of capping 10-year yields and the smaller float given the substantial ownership by the BOJ itself. 

Fortunately for the Bank of England, the UK economy appears to be in a bit of a sweet spot. The labor market is firm, and monthly GDP readings suggest growth is near last quarter’s pace. Price pressures have eased.Sterling has fallen about 2.3% on a trade-weighted basis, but it has not prevented sharp losses (~9.2%) in the heavily-internationally exposed FTSE 100. The UK’s 10-year benchmark yield is off 21 bp over the past month, making it the best performing major market. The implied yield of the June 2019 short-sterling futures contract has fallen by 16 bp in the past two weeks.