Weekly market wrap

By David Morrison  |  29/03/2018 13:38

A look at the slide in tech, market uncertainty and an overdue pick-up in volatility

End of quarter

This Easter holiday couldn’t really come at a worse time, although there’s some hope that the break will help bring calm to the markets. But now we have a long holiday weekend which coincides with the close of the first quarter – typically a time when fund managers “window dress” their stock portfolios, dumping underperformers and buying up outperformers. This may add to volatility and could result in some eccentric moves.

Indices appear vulnerable

Investors have been on edge ever since February’s equity sell-off which was triggered by the dual spike in volatility and bond yields. Despite a strong rebound which saw the Dow and S&P 500 recoup three quarters of their losses while the tech-heavy NASDAQ made a fresh all-time high, the major US indices remain fragile with many in danger of breaking back below some significant technical levels. This week the Dow and S&P 500 briefly slipped beneath their respective 200-day simple moving averages (SMA) while the major European indices are making lower highs and lower lows, which doesn’t inspire much confidence.

Tech takes a knock

Meanwhile, there are concerns growing in tech-land. A handful of stocks have been responsible for a very large percentage of overall market gains, particularly in the last five years or so. The FAANGs (Facebook, Amazon, Apple, Netflix and Google (now Alphabet)) have been hoovered up by portfolio managers in a trade which has proved to phenomenally profitable, with apparent little downside risk. This has happened despite growing concerns over the size and reach of these companies with some policymakers calling for further regulation, the application of special tax measures and even the break-up of these companies to curb their influence. These voices have become even more shrill after Facebook was busted for the way it farms and then sells on user data. Shares in the company have fallen 20% since hitting their all-time high at the beginning of February. But this selling hasn’t been limited to Facebook as other members of the FAANG group have also caught the fall-out. Alphabet is down 16% over the same period while Amazon has lost 13%, Netflix 10% and Apple 9.5% after hitting their own record highs on 13^th March. Meanwhile that other tech darling, Tesla, has lost 29% since the beginning of last month on poor production numbers and renewed doubts about the safety of its electric vehicles.

Bond yields slide

Once again, bonds are in focus – particularly the US 10-year Treasury. But this time yields have slumped with the 10-year crashing back below the key 2.80% level which has held as support for close to two months. Investors are piling back into the perceived “safe haven” of fixed income as stock markets slide. Yet this is happening even as the spread of LIBOR over OIS (a key measure of market risk) widens to levels not seen since November 2008, at the height of the financial crisis. Investors are also thought to be going back into bonds as inflation remains subdued (on Thursday Core PCE rose 1.6% year-on-year – still well below the Fed’s 2% target) while there are questions over the future robustness of US economic growth. If there’s a moderation in the outlook then the Fed may be more cautious than anticipated when it comes to monetary tightening, despite its ongoing programme of balance sheet reduction apparently on autopilot.
 
Volatility elevated

So, it’s fair to say that there are several contradictory views about the future direction of equities and bonds, given the uncertain outlook for the US economy. And this comes against a backdrop of Trump’s trade tariffs, the seemingly never-ending replacement of senior White House staff and uncertainty over the geopolitical outlook as the US administration appears ready to lash out simultaneously at China, Russia, Iran and North Korea. Taken together, it looks reasonable to suggest that stock market volatility may remain elevated for some time now, getting back towards historical norms. This should provide a more interesting environment for traders, although investors will no doubt be hoping that “normal service” will soon resume.
 
Key events next week

Saturday -            CNY Manufacturing/Non-Manufacturing PMIs

Monday -             JPY Tankan Manufacturing/Non-Manufacturing PMIs; CNY Caixin Manufacturing PMI; USD Manufacturing PMI, Construction Spending

Tuesday -             AUD Cash Rate, RBA Rate Statement; EUR German Retail Sales, Spanish, Italian, French, German and Euro zone Manufacturing PMIs; GBP Manufacturing PMI

Wednesday -     AUD Retail Sales, Building Approvals; CNY Caixin Services PMI; GBP Construction PMI; EUR CPI Flash Estimate; USD ADP Non-Farm Employment change; ISM Non-Manufacturing PMI, Factory Orders, Crude Oil Inventories

Thursday -           CNY Bank holiday; AUD Trade Balance; EUR German Factory Orders, Spanish, Italian, French, German and Euro zone Services PMIs, Euro zone Retail Sales; GBP Services PMI; CAD Trade Balance; USD Challenger Job Cuts, Unemployment Claims, Trade Balance

Friday -                 CNY Bank Holiday; USD Non-Farm Payrolls, Unemployment Rate, Average Hourly Earnings.
 
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