- Global stock markets are selling off amid fears about tightening monetary policy from central banks.
- Goldman Sachs: The data is “fundamentally good.”
- We’ve rounded up the analyst reaction from big banks and trading houses.
LONDON – Stock markets around the world have been tanking over the last 24 hours, following the biggest single-day points drop for the Dow Jones Industrial Average in history.
Traders are concerned that US inflation could rise faster than expected and force the Federal Reserve to tighten monetary policy faster than has been forecast. That could mean tougher business conditions for companies who have grown used to cheap and free-flowing money in the year’s since the 2008 financial crisis.
Business Insider has rounded up what analysts from big banks and trading houses are saying about the sell-off. There doesn’t seem to be consensus around whether we’ve reached the bottom.
Check out what analysts are saying:
UBS Wealth Management: ‘Market declines of this overall magnitude are not uncommon’
Mark Haefele, Global Chief Investment Officer at UBS Wealth Management: “While the speed of the market declines over the past week is jarring, market declines of this overall magnitude are not uncommon. Over the past 40 years, US stocks have averaged a 10.6% peak-to-trough intra-year decline during bull markets.
“And the positive fundamental backdrop of above-trend global growth and healthy corporate earnings remains intact. Indeed, amid the day’s sell-off, the US ISM non-manufacturing index rose to a stronger-than-expected 59.9 and the new-orders and employment components also rose, suggesting underlying growth momentum remains strong. Elsewhere, Japan’s services PMI rose to a three-month high, and China’s service sector PMI hit the highest level in six years.
“In our view, risks of the Federal Reserve raising interest rates too quickly and triggering a US recession over the next two years appear very low. Meanwhile, the median S&P 500 return in non-recessionary years since 1960 has been 15%. Further, following past spikes in volatility (VIX above its 90th percentile), the S&P 500 has posted 12-month gains 87% of the time, with a median return of 22%.
“That said, markets are likely to remain volatile in the near term. A single-day decline as sharp as Monday’s could force further selling as some systematic strategies are forced into deleveraging, and other investors face margin calls, before longer-term investors such as pension funds begin to rebalance and buy the dip.”
Goldman Sachs: ‘We do not think a bear market will result’
Ian Wright, executive director at Goldman Sachs:“We are not surprised in the equity pull-back, as we were more surprised in the speed of the rally to start the year, which raised correction risk. However, amid the sell-off the macro data of last week was fundamentally good: both the ISM manufacturing and services had 59 handles, and the US payrolls report signalled above consensus job growth.
“So far our economists are not concerned about the tightening of financial conditions, ultimately we do not think a bear market will result and we remain OW equity over 12 months. As we wrote previously, as long as growth data is good we would stay long risk and hedge the 5-10% drawdowns, as opposed to the full bear market, via put spreads, for example.”
Bank of America Merrill Lynch: ‘We expect this equity-centric shock to fade’
BoAML’s Global Equity Derivatives Research team:“While concerns over rates risks are the common narrative, rates vol remains remarkably subdued. Rather, the largest shocks look more driven by positioning in equities and short equity vol, which generated the largest rise in VIX futures in history – illustrating both the value in VIX “fragility hedges” and the risks to some popular short vol strategies that are now at risk of being wiped out.
“Quant funds (CTAs and Risk Parity funds running vol control) have likely contributed to the equity selling in one of the largest deleverings in our models’ history, but their impact should dissipate quickly from here.
“Absent contagion back into rates, we expect this equity-centric shock to fade and would position for equity vol mean reversion via VIX put structures; however, it presents another wake-up call that equities have been significantly underpricing risk.”
Accendo Markets: ‘A perfect storm’
Michael van Dulken, Head of Research at Accendo Markets: “Whilst the roots and drivers are sure to be discussed for days, it looks to emanate from a perfect storm of reasons including, but not restricted to, a strong 2017 rally extending into January, low volatility, low interest rates, over-optimism and complacency, over-leverage and financial engineering, all coming to a head as investors react to the possibility of higher/faster interest rates rises with bond yields creeping higher to jeopardise the current market situation.”
Deutsche Bank: ‘Risks are building that 2018 could have moments of big adjustments’
Jim Reid, Macro Strategist at Deutsche Bank: “If you thought last week was a shock in fixed income, just imagine what would happen if we actually saw CPI numbers consistently beat expectations on either/both sides of the Atlantic.
“Global bond markets are still set up for a long period of low inflation ahead, in our view. In our global 2018 outlook tour, the biggest push back to our view was that most didn’t believe inflation would misbehave as much on the upside in 2018 as we did, so I don’t think markets will be well prepared if it does.
“One higher average US hourly earnings print (2.9% yoy vs 2.6% expected) doesn’t make a trend but as we’ve been saying for several months now, in our view, everything is set up for higher US inflation this year (eg labour market tightness, late cycle tax cut boost, traditional lag between growth and inflation etc.). If it doesn’t happen this year with all the forces present you’d have to tear up all your textbooks really.
“In terms of what impact higher inflation would have. You only have to see last week’s price actions for some clues. 10yr Treasuries moved 19bps higher (+5.1bps Friday), the S&P 500 -3.85% (-2.12% Friday) and the VIX (from 11.08to 17.31 on the week, 3.8 points higher Friday).
“In the process, 10yr Treasuries hit their highest yield since January 2014, the S&P500 had its worst day since September 2016 and the VIX climbed to its highest level since the week of the Trump election victory 15 months ago. So for equity vol we’ve already bypassed the whole of the 2017 levels now in early 2018.
“This move to higher inflation and higher yields probably won’t be a straight line but the risks are building that 2018 could have moments of big adjustments and spikes in vol. A reminder that our credit forecasts for 2018 are for IG to widen 25bps and HY c.100bps due to higher inflation and yields.”
ETX Capital: ‘Should not herald Armageddon’
Neil Wilson, a senior market analyst at ETX Capital: “We are not there yet but the chances of this selloff turning into full-blown bear market have increased dramatically. If investors look at underlying earnings growth and the fundamentals of the global economy, there is reason for optimism. However, once this kind of stampede starts it’s hard to stop.
“So if the fundamentals are OK, then this looks like a technically driven selloff – therefore one that should not herald Armageddon. Plenty have noted that equities were jacked up by low rates and now need to readjust to higher rate world.
“As noted yesterday, after a decade where central banks have been seeking inflation, equities have been caught off guard by what could be a sudden release of pent-up inflationary pressures that will favour labour over capital; a situation not known since the crisis as ultra-low rates have fuelled asset prices. All this would point to a bond bear market ensuing and with bond yields inching higher, it could keep the pressure on equities, making it difficult for investors to come back in.
“Equity markets have been screaming for the bond market to offer fair value – now they are starting to the equity market is freaking out. Ten years of an exceptional carry trade – zero rate borrowing for a healthy +2% return on equities looks over. Now that yields have pushed up this trade needs to be recalculated; equity prices need to fall to adjust.”
UBS: ‘A reset in asset valuations’
Keith Parker and team, strategist at UBS: “We see last week as a reset in asset valuations with market expectations for rates moving closer to the Fed dots, not the start of a new correlation regime. Positive equity-bond correlations historically (1966-1996) coincided with the extreme rise and fall in inflation, and a much steeper Phillips curve.
“More companies begin to pay out dividends this week, continuing through February, which would equate to over $US60bn in implicit flows to investors that are typically reinvested. Additionally, fund flows, which have picked up in January, and buybacks are seasonally strongest in Q1; the earnings blackout period for buybacks is also ending. We see repatriation pushing S&P 500 net buybacks toward a new peak of $US550bn in 2018, while M&A has already surged to start 2018 and should continue to rise.”
ADS Securities: ‘We could be some way from the bottom’
Konstantinos Anthis, ADS Securities researcher:“It seems like the perfect storm in the equity markets which have quickly turned from looking all bright and sunny to seeing strong losses and we could be some way from the bottom. The combination of bond yields rallying above 2.8%, the stronger than expected wage growth that suggests that the Fed might have to tighten their monetary policy faster than anticipated and uncertainty on whether the intended effect of the Trump tax reforms will actually find its way to the real economy are weighing down on stocks.
“Heavyweight players and institutional investors – especially in the US – seem to treat this sell-off as nothing out of the ordinary as 5% corrections in the stock markets tend to happen more often than everyday people realise. However, if this perfect storm continues to develop and a new reality of higher bond yields and more aggressive monetary tightening sets in then the pain in the equities will persist.”
CMC Markets: ‘An improving economy will hasten the pace of further interest rate rises’
Michael Hewson, the chief market analyst at CMC Markets: “It may seem counterintuitive but further improvement in yesterday’s US economic data only served to amplify concerns amongst investors that an improving economy will hasten the pace of further interest rate rises in the coming months, from the US Federal Reserve.
“There is a caveat in that if we get any more days like the last couple of days that calculus might well change if central bankers fear that a too aggressive tightening policy might cause more problems than it would solve.
“It’s certainly been an interesting introduction for new Fed chief Jerome Powell, as he starts his tenure in the US central bank hot seat.”
Pantheon Marcoeconomics: ‘We don’t expect the rout to continue’
Ian Shepherdson, Chief Economist at Pantheon Marcoeconomics: “While we have been waiting for a correction in stocks for some time, we don’t expect the rout to continue. Investors likely will be more circumspect when the floor is reached, but we’d be surprised to see the freefall persist.
“At this point, the drop in stock prices does not seriously reduce the chance of the Fed hiking in March. Another few days like yesterday would change that, but that’s not our base case. Either way, though, Jay Powell’s first day as Fed Chair wasn’t the ideal start. His Monetary Policy Testimony later this month is shaping up to be quite an event.”
Saxo Bank: ‘The low volatility regime is likely dead’
Peter Garny, Head of Equity Strategy at Saxo Bank: “The low volatility regime is likely dead – 2017 and early 2018 were a crazy anomaly. So far the blow up is scary but has been relatively contained. This is the largest two-day sell off since the flash crash of August 2015. A 12% top-to-bottom move in S&P 500 futures is likely the product of a chain reaction that started last Friday when unexpectedly strong US wage growth figures pushed US rates higher. S&P 500 futures are now up 2.6% from their lows.”
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