Weekly research notes covering the full spectrum of asset classes

Market Commentary—19/10/18

October 19, 2018 / Ben Acton Bond

  • It seems there may not be a quick end in sight for the current global market sell-off. Equities slid across the board except for the Shanghai and Shenzhen indices, where investors adjusted expectations after lackluster third-quarter Chinese GDP growth data (6.5%) caused a sell-off. Guo Shuqing, head of China’s Banking and Insurance Regulatory Commission, is confident the country’s fundamental data is not reflected on the market.
  • Moving to US equity, the S&P 500 fell 1.44% on Thursday and the Nasdaq fell 2.3%, mostly because of the higher market beta on tech stocks, and both are expected to open flat. European stocks also moved down, with Italy’s FTSEMIB suffering the worst decline at 1.3%.

  • While monetary policy tightening and trade tensions are ongoing global concerns, Italy’s bond yields pose a more immediate threat to Eurozone stability and prosperity. The European Commission announced Italy’s draft annual budget to be in serious breach of EU rules, causing a sharp sell-off on Thursday. Ripple effects increased other PIGS countries borrowing costs. Italy’s populist government is pushing for a 2.4% budget deficit while still having the second largest debt pile in Europe. Rome seems to be convinced that this budget will provide Italy with a much needed boost to lift many Italians out of poverty.

  • Looking at the data, it is interesting how sharp increases in Italy’s borrowing costs have, on average, been strongly negatively correlated to URTH, a global equity market ETF.
  • The UK and Spain reached a deal over Gibraltar, easing concerns that this issue may disrupt Brexit negotiations.
  • Facebook hired Nick Clegg, former UK deputy prime minister, as Head of Global Affairs.
  • Brent Oil prices moved back above the $80 a barrel threshold, possibly finding support at a psychologically significant level. With global equities sliding, gold prices have increased 4% over the past week and now stand around $1230/oz.