It has been a tumultuous week for equity markets with the MSCI All Country World Index sinking to an eight month low on Thursday morning. Although preceded by four consecutive down days, the sell-off truly gathered momentum on Wednesday when the S&P 500 suffered its largest one-day fall since February. While there was no single catalyst for the US index move, a rout on Asia ensued and then Thursday morning brought painful losses for European markets which ended the session at a 21 month low.
Highly valued technology stocks plummeted hardest, but losses were widespread with no sector escaping the pain. Almost all suggestions for what could have been the trigger of the panic pointed to rising US bond yields, given the negative implications of higher borrowing costs for economic growth, and thus equities. Most notably President Trump who, as the 10 year Treasury yield hit a seven year high and the S&P tumbled, proclaimed that the Federal Reserve (Fed) had “gone crazy”. Over the course of this year, Trump has repeatedly criticised the Fed for being too aggressive with the pace of interest rate hikes, which have been aimed at preventing the economy from overheating.
Escalating fear that trade tensions between the US and China will worsen, and the perceived trouble this could spell for global growth, was another probable contributor to the market turmoil. On Wednesday, Treasury Secretary Mnuchin added to market stress when he warned China against devaluing its currency and highlighted the country’s economic woes.
Others have sought justification for the leg down on the basis that the upcoming earnings season is likely to disappoint compared to analyst forecasts, the implication being that current stock valuations are too high. International Monetary Fund President Christine Lagarde pointed out that US stocks have hit record levels recently, suggesting that a correction should be expected. Lagarde also directly contradicted Trump in stating that the Fed was right to be raising rates in response to building inflationary pressure.
However, the latest US inflation figures, released hours after Lagarde’s comments on Thursday, were a touch weaker than expected. Core consumer prices, which strip out volatile items like oil and food, rose by 2.2% in September versus forecasts of a 2.3% increase. Together with data showing a rise in jobless claims, also published just ahead of the US market open, the inflation print prompted suggestions that the Fed might have reason to ease its tightening agenda. Indeed the 10 Year Treasury Yield dipped slightly, but the S&P 500 failed to stage a comeback and ended the day down another 2.1%.
With losses extending for a fifth consecutive trading session, investors were left grappling with the question of whether the slide marked the beginning of the end of the ten year equity bull market, or if the clear out had in fact created a lucrative buying opportunity. Whilst still too early to tell, a bounce in the Asian indices overnight and early European trading on Friday suggested the sell-off has paused, at least for now.