Last week we witnessed a sell off across global markets, sparked by rising US bond yields and positive comments from the US Federal Reserve surrounding the continuation of higher interest rates. These worries soon escalated to include trade wars, rising inflation and high stock valuations. Concern quickly turned to panic causing investors to sell stocks indiscriminately.
Amongst those impacted were large technology stocks that have led the US market’s charge in 2018. Amazon, Google and Facebook came under heavy selling pressure, as investors assessed the higher costs they may face from higher wages and greater security requirements after recent data-theft scandals.
Fundamentally, the global economy remain robust and company earnings continue to deliver. Inflation remains under control, liquidity conditions are supportive and central banks will continue to do whatever necessary to support growth through the cycle. Ultimately investors have overacted to negative news flow and this has created some short-term panic. This is simply taking some air out of the system so that markets do not overheat in the longer run.
Although it is likely in the coming days that market behaviour will calm down and investors will start to focus once again on the positive fundamentals, most corrections take some time to complete and this would be a very mild one if it is already over. So, it is possible there is some further equity weakness and then some consolidation before the bull market resumes once again. It’s likely that Trump will not step back anytime soon from pressuring China and that the Fed will not stop tightening policy unless things get materially worse.
Elsewhere, concerns about the Trump administration’s trade war mounted after the International Monetary Fund (IMF) said a full-blown war could trim 0.8 per cent off global growth in 2020, a move that would impact corporate earnings. While growth was cut in US and China, they predicted that UK growth would expand this year and next but warned that a no-deal Brexit remained a risk. The IMF also issued a warning to the Italian government over its budget plans and said the country should shrink the country’s deficit in accordance with the EU plan rather that increasing it.
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