Without any doubt it was a difficult year for the stock markets. Recently nearly all equity indices have erased their 2018 gains. October has also lived up to its reputation in being the worst month for equities.
The stock markets bled red, and investors were anxious and cautious. The equity markets have gone through their longest bull run, and markets participants were only expecting a correction of 10% at some point. However, the recent massive sell-off prompted increased fears as the markets were navigating into a sea of headwinds, with growing concerns that it is more than just the markets correcting themselves.
The policy divergence between the US and the other major central banks was the dominant driver that had altered the spectrum of the buoyancy in the markets at the beginning of the year. A hawkish Fed prevented the equity markets to outperform in 2018.
A sudden dovish shift whereby a few Fed officers appeared to be less hawkish has captured the markets’ attention. Chairman of the he Federal Reserve, Jerome Powell’s comments were the trigger: “interest rates are close to neutral” compared to “interest rates are a long way from neutral” which were embraced by equity traders. Wall Street slowly moved into green again as the possibility of fewer rate hikes boosted equity benchmarks:
Jerome Powell appears to have just put a floor under stocks!
Source: Bloomberg
It would make sense to say “yes” as the Fed risk has resolved itself and now the markets have “one less” headwind to think about. When the markets dropped as much as 10%, such dovish news is deemed favourable as it plays an essential part to the bottoming process.
However, while the change in language does indicate “dovishness” and be the reason for the market to cheer up, the price action might be exaggerated or could lose steam as trade tariffs with China is far from resolved even though there is more optimism regarding trade negotiations. The stock markets are still fragile and vulnerable to:
We have also seen that technology investors had a rough two months having witnessed the FAANG group wiping off $1 trillion in market value. Fundamental and external risks have forced investors to stop and think.
Source: Bloomberg
Source: Bloomberg
Overall, the equity markets were mostly hit by two major headwinds: Higher rates and Trade tariffs. Now that Powell cleared investor’s doubts regarding interest rate. The attention now moves to the G20 summit. Traders are contemplating different scenarios on how the summit will unfold. The most likely situation given the conflicting news from the White House will be that:
Both parties will announce some kind of negotiation to somewhat calm the markets, but the US will most probably increase tariffs as expected.
Whether the Stock Market will end in the green or still be flashing red, it may very well depend on President Trump.
This article is written by a Encrypt Investment Analyst and is based on their independent analysis. They remain fully responsible for the views expressed as well as any remaining error or omissions. Trading Forex and Derivatives carries a high level of risk.
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