Duncan Donald

Fri, Sep 11

Global stocks fall, but has the bubble really burst?

If there is one thing this year has taught us, it's to expect the unexpected, and across the financial markets there were certainly some surprises this week making it a hugely volatile week.  Following on from the drop seen in global and in particular the US stock market seen last week, all eyes were on Tuesdays open of the US markets after the bank holiday weekend in the US.  Upon the reopen, the markets again were in sell mode, yet again without any real macro or geopolitical justification.


With the S&P and Nasdaq having gone from the all-time highs seen last week of 3,600 and 12,500 respectively, late in Tuesday’s session we put in lows for the week of 3,300 and 11,500.  It wasn’t always a sellers’ market, there were upside surges from time to time but the weight was certainly to the downside and current momentum certainly seems to have shifted, with those late to the stock buying party getting hurt, as the markets fell nearly 8% as was seen in the Nasdaq. Its worth bearing in mind however, that those earlier investors would have just seen part of their gained profit eroded, as with, for example the tech heavy Nasdaq having gained nearly 88% since the March crash, as painful as the fall in the last 10 days has been, with perspective, it is just 10% of that up move.


Again we find ourselves at the turn of the week deliberating around the close and open of the markets either side of the weekend and whilst the markets feel and look heavy, we have to consider that with no true driver lower, sunken interest rates, and it simply being in nobody’s interest to lower stock there will remain buyers out there, but for now they seem keen not to stand in the way of the train, just let it stop itself and catch it when its on its way back.


It was also an interesting week for the Eurozone. As we reported last week, ECB members in speeches were indicating that they were growing concerned over the appreciation of the Euro, giving the feel of a line in the sand at 1.2000 in the EUR/USD rate, thus pushing us back towards 1.1750. This level for now feels a tough nut to crack and will be pivotal as we move forwards. Thursdays European Central Bank Meeting brought more optimism for the economic outlook than was expected from Christine Lagarde, bringing the Euro back into favour as the reserve currency of choice as it straight lined up above 1.19 before risk related US Dollar buying brough it lower. It was Lagarde’s refusal to commit to discuss the level of the currency that brought the buyers out, as she repeatedly reiterated that the ECB’s mandate was for price stability not currency control.  


The resurgence of the Euro this week was even despite the rise in Covid cases across the countries within the bloc, with France now experiencing the worst daily cases seen in 3 months. In the UK a surge of cases back above 3000 a day mark, has brought fresh lockdowns and group meet ups limited to 6 again. The UK’s Pound struggled greatly this week, as PM Boris Johnson's government reneged on agreements signed with the EU over Northern Ireland and trade, naturally angering the EU and raising questions over the UK’s integrity, a factor which will have long term repercussions. Almost immediately The US Democrats Nancy Pelosi stated if in power they would not agree a trade deal with the UK if they did not adhere to the Good Friday agreement. It wasn't just internationally Johnson faced criticism, there are a good number of his own party appalled with the handling of this situation as it stepped beyond gamesmanship to illegality.


It was the Pound that suffered most, having reversed from the 1.3500 highs seen a few weeks ago, printing a low on the week of nearly 1.2750.  Despite the fact the implications of a no deal Brexit are equally as damning for Europe as the UK, the EUR/GBP level soared from 0.8900 to 0.9200 making it one of biggest currency movers of the weak. The negotiations remain ongoing, but the markets continue to price in the fact we see no deal, BUT it is noteworthy that should a deal be plucked from the ashes of this debacle, that will now be the surprise trade that will likely bring a minimum of 5-10% appreciation to the Pound, such is the limited expectation of that eventuality at this time. 


The Week Ahead:


Monday -  A very quiet start to the week with the only notable data coming from Japan with their Industrial Production numbers. 


Tuesday - First up comes the minutes of the Australian Central Bank meeting. From the UK we get Unemployment, Average Earnings and Claimant data. There is also German Economic sentiment data (Zew). In the US session we get Manufacturing and Import numbers. 


Wednesday - The busy day starts with UK CPI, RPI and PPI Inflation data, before Eurozone Trade Balance numbers. In the US session we see Canadian Inflation and US Retail Sales. In the evening comes the interest rate decision from the US Federal Reserve and a statement, before late in the session we get New Zealand's GDP numbers. 


Thursday - Australian Unemployment numbers kicks the day off before the Bank of Japan's Monetary Policy statement and press conference.  At midday UK time it's the Bank of England’s interest rate decision. From the US we get weekly Unemployment numbers. 


Friday - A relatively quiet Friday starts with Retail Sales data from the UK then Canada in the US Session. From the US we receive the University of Michigan Consumer Sentiment Numbers.