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Market Commentary—16/10/18

October 16, 2018 / Ole Urfels

Today’s markets show a positive reaction to easing risk factors and investors’ sentiment, pushing up stocks.

Equities: The Nikkei closed up 1.25% rebounding after yesterdays’ poor performance. The DAX30, S&P500, and FTSE 100 are up 0.93%, 0.86%, and 0.07%, respectively, also recovering slowly from the past week’s downturn. In the US, positive earnings push stock futures helping the S&P500 to a strong open. German gains are pushed by demand for export and technology companies. As Italy’s government meets the EU deadline to approve a budget draft, risk eases, helping assets to trade higher and push down bond yields.

Fixed income: 10-year treasuries trade mostly unchanged with US 10-year Treasuries at 3.16, German Bunds at 0.49, and UK 10-year Gilts at 1.62.

Commodities: Brent crude oil trades just above 80.00 not gaining momentum after the 7.5% sell-off last week. Gold only up 0.34% losing momentum as risk sentiment eases.

Currencies: On the back of higher US futures USDJPY also showed some upward pressure of 0.43%. The Sterling continued to rise 0.50% in hopes of positive Brexit negotiations. The coming summit will be watched closely as Brexit rhetoric is the main driver for the Pound. The greatest move was in the NZDUSD (0.57%) fueled by better-than-expected inflation data released during the night. Risk sentiment is an important driver for risk-off versus risk-on currencies. With the VIX falling below the 20-mark the USD could some ease as investors look outside the USD for investments opportunities.

October’s fund manager survey shows bearish investors’ sentiment:

A record 85% expect the global economy to be in the late cycle. However, the bearish signs are said to only signal a short-term bounce in risk. Compared to the US, global- economy investors see much better prospects for the US.

The weak expectations are said to be a result of federal monetary tightening, a widening gap between RoW and US forecasts, and high corporate leverage. Nevertheless, the Fed has some leeway as the FMS reveals that investors would rotate from equities to bonds at a rate of 3.7%. Finally, the grates tail risk is perceived from trade war, quantitative tightening, and a Chinese slowdown.