It was another volatile market for equities with the VIX jumping to 27.5, after having remained steadily around 13 for all of September. US Treasuries did what they were supposed to, 10-year yields rallying 12 basis points to 3.076%. Even with 3.5% Q3 GDP beating forecasts, US equities led on the downside. The S&P 500 fell 109 points to 2658 on the week and the MSCI World Index absorbed similar losses of -3.9%. By Friday morning the -4% fall in the S&P 500 brought the Index into correction territory: when downside exceeded -10% from highs on the 21st September. Emerging Markets were broadly flat with the EMBI+ ending last week unchanged; but this only narrows the 2018 EM underperformance with the EMBI+ still down -6.4% year to date. Within the EM sector, China’s stock market continues to underperform with the CSI 300 now down -22% so far this year.
Returning to the S&P 500, what had been +11% year-to-date return in the first three quarters is now down to just +1%. Even as more earnings continue to beat expectations this season it seems that the market just doesn't care right now. Last season forecast-beating EPS reports on average led to a 1-day boost of 1.2% in market value; so far this quarter the number before the decimal is zero, with the average only 0.2%. Although last week saw strong third quarter reported earnings, many beating expectations, they fell below the outstanding performance of the first and second quarter. Alongside reported earnings growth slowing, more companies also issued negative guidance for future earnings. At the moment the adjustments have been largely viewed as a healthy correction of run-away optimism and not a clear turn towards risk-off. But increasingly we are seeing input, freight and labour costs rising in tandem, and still wonder if some excessive optimism in earnings expectations remains.
Again the euro took a hit last week falling 1% and below 1.14 versus the dollar. Much of the weakness came after unprecedented demands by the European Commission on the Italian government to revise their budget for 2019, followed by weak PMI data across European majors – including 1 and 2 point shortfalls from forecasts for German manufacturing and services respectively. The Eurozone October PMI fell to a 25-month low of 52.7, from 54.1 in September; whereas US PMI rose to 54.8 from 53.9. Meanwhile, the ongoing Brexit impasse is adding pressure on PM Theresa May to seek an extended transition period with the UK remaining in the EU customs union; likewise China trade talks have stalled with the US demanding Beijing first propose how it will address economic concerns like intellectual property theft before resuming talks.
Looking to the week ahead: we begin on Monday with US Core Personal Consumption Expenditures (the more reliable inflation measure), retail sales in Japan, while Philip Hammond has the impossible job of delivering a credible Budget under the uncertainties of Brexit. The Eurozone publishes Q3 GDP on Tuesday and CPI on Wednesday alongside Japan’s Industrial Production and China’s PMI figures. On Thursday the Bank of England meets and US ISMs are released, and on Friday we’ll see US employment data along with Eurozone manufacturing PMIs. Alongside a busy economic calendar the week ahead will see the market reaction to Brazil’s election of congressman Jair Bolsonaro and a focus on US politics in the final week before the US midterms next Tuesday.