US, so here we go again with the Nasdaq, S&P500 and Dow Jones down between 3,75% and 4,15%. Half of this drop happened within the last hour of trade and accelerated up to the close. VIX is up again but the rise is not nearly as extreme as we saw earlier this week. Other parts of the market (bonds, commodities etc.) remain calm relative to equity markets, which gives us comfort in our story about this being a technical selloff. One could argue that yesterday look more like a classic risk off as it was led by the cyclicals but this is still not a reason to worry in our opinion. The selloff is still highly technical and with the fragile market situation we should expected higher volatility. So what changed yesterday if anything? Some commentators argue that Dudley comment about ”So far I’d say this is small potatoes,” made things worse. What Dudley is actually saying is that Fed is not so worried about short-term volatility but instead focusing on the real economy and here they are seeing what they want to see and expect to see so this should not change the Fed, which is actually positive. The senate didn’t make it yesterday so now we have another round of government shut down which is of course not the best timing when market are as nervous as now. However, we have been through this before (last time 3 days in January) and don’t think I will have any major economic impact. We expect the congress to sign a short or long-term deal rather soon. If the current version or a slightly adjusted version of the budget proposal from senate gets approved it should be seen as positive from markets.
European stocks was also down across the board and also with biggest drop happening up to the close (Stoxx 600 -1,6%). However, US is the epicentre of this storm so one shouldn’t put too much focus on Europe. BoE delivered what some would say was a hawkish statement but one month ago this would have been seen as positive. What they actually did was raising the growth forecast marginally without raising inflation forecast. This is still a “goldilock” thing but it sent rates higher and that’s not what equity investors are hoping for at the moment.
In Asia, markets are down led by China (Shanghai -4,85% and Hong Kong 3,58%). Once again it interesting to see that the rest of Asian markets is down less that the US ones.
Bottom line: We still see the current selloff as entirely technical, driven and still view fundamentals as supportive for equities. Therefore we stick to the view that this remains a buying opportunity for those who can live with some volatility. We are not worried to the same extent as market about higher yields from current level as we still view yield level and monetary policy as extremely supportive. Also higher yield tends to be positive both for equity performance and valuation and not vice versa as some would argue.
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