Stock markets around the globe bleed, US officials play down situation

Summary:

• Huge declines on the US and Asian stock markets

• Companies issue profit warnings on the back of the trade conflict between China and the US

• Mnuchin does not seem concerned, Trump blames Fed

• Election poll hints Bolsonaro will once again beat Haddad

Looking at the quotation board of the US and Asian indices one can see a real bloodbath. Each of the three main indices from the US posted over 3% loss with Nasdaq (US100) slumping as much as 4.08%. Among reasons one can find Treasury yield spike that also doomed markets at the beginning of the year. However, there was also another reason that can be named a more direct trigger of the sell-off that resulted in S&P 500 (US500) experiencing the biggest single day drop since February. Namely, Fastenal (FAST.US), the industrial and construction supplier, issued a profit warning saying that the trade spat between China and the United States causes material costs to raise and therefore bites into profit margin. It is worth to note that such an announcement came just as the earnings season is about to begin. Elsewhere, LVMH (MC.FR), the French luxury goods manufacturer, informed that China is more strict in enforcing customs rules. While these may be just warnings from two companies it should be noted that reasons cited by them are more universal and are likely to hit a huge number of enterprises. Adding to that monetary policy tightening around the World what results in smaller stimulus for the economies we get quite a gloomy outlook for equities. VIX index, or as some call it the Fear Gauge, surged over 40% and finished just a notch below the 23 pts. Apart from that, the US dollar is the weakest currency among the majors.

US500 (S&P 500 futures underlying) took the biggest one day hit since February. The index is trading around 6.3% beneath its ATH a notch above the 2945 pts now. Notice that the benchmark pulled back to the 200-session moving average, the same technical level that managed to fend off the bears at the beginning of the year (orange circles on the chart above). Having said that, today’s session may be a test for the US stock market. Source: xStation5

Even greater declines were spotted during the Asian trading session. Indices from Taiwan and Shanghai were the biggest underperformers as they slumped 5.4% and 6.2% respectively. Amid such a severe sell-off it is not surprising that we got some comments from the top officials. The US Treasury Secretary Steven Mnuchin highlighted that the US economy fundamentals are strong and what we are observing is just a correction. However, it is not so rosy as Mnuchin thinks. Throughout the 2017 the US debt increased by by around 2.8% in the 2017. Now when we compare this figures with a 5.4% increase in 2018 the fundamentals do not look too good. It is true that the US debt increase by around 5.6% in 2016 but one should not forget that 2018 is still not over! This significant acceleration in the pace of indebting shows the real cost of the tax overhaul passed last year. Apart from that, the US President Donald Trump also took his chance to comment on the situation and he did it in his well-known style. Namely, Trump failed to associate a weaker corporate earnings outlook with the trade spat, even as the aforementioned companies (Fastenal and LVMH) clearly linked one to another. Instead he found someone else to blame… the Federal Reserve. He said that tariffs are not hurting economy and companies but Fed doings (rising rates) are. He once again stressed that he is disagreeing with the Federal Reserve and added that there are no reasons for monetary tightening.

The pace of the US indebting accelerated significantly in the 2018. Source: Bloomberg

Moving out of the stock market sphere let’s take a moment to look at the situation in the Brazilian politics. Jair Bolsonaro, the markets favourite, won the first round of the presidential elections on Sunday with a stunning lead. He will clash with Fernando Haddad in the second round on 28 October. The results of the first election poll that was conducted by the Datafolha just came out and are hinting at the repeated outcome of the first round. Namely, Bolsonaro is viewed to secure 58% of votes while Haddad will get remaining 42%. Given the discrepancies in views between the two and the market reaction to results of the first round in case the poll results are confirmed Brazilian real and equities may get a moment of relief.