With hurricane Michael battering the US coastline it is perhaps apt that a hurricane of selling has hit US stock markets, as the Dow and S&P500 posted their worst losses since February this year, returning US stocks back to levels last seen in July.
President Trump weighed in again blaming the Federal Reserve for the losses, claiming they were raising rates too quickly, and accusing them of being “loco” or crazy.
While we have become used to the sound of President Trump of saying what he thinks, his change of tone comes across as rather unseemly at a time when G7 leaders generally refrain from criticising their central bankers. It is true that President Trump is no ordinary President however it is never a good look to accuse your independent central bank of being crazy. It is the sort of behaviour or of language that tends to come from more authoritarian leaders.
In any case the winds of selling have continued in Asia and has continued in Europe this morning, markets which have been underperforming relative to US markets already this year, and the reasons for this are twofold.
Firstly the rising trade tensions, as the US re-orientates its trade policy, throughout this year has weighed on European and Asia markets where companies tend to be more weighted to exporting goods and services, and secondly investors have slowly wised up to the fact that the slowdown being seen in the global economy, is likely to trickle down into potentially lower profit margins at a time when central banks, particularly the Federal Reserve are looking to normalise policy to prevent overheating a US economy getting a bump from a significant fiscal boost.
This helps explain this week’s largely expected downgrade by the IMF of the global economic outlook, highlighting particular concerns around emerging markets.
Of particular concern are markets in Europe which have consistently underperformed since peaking at the beginning of this year, with the DAX set to open at its lowest levels since the beginning of 2017. The FTSE100 has also opened at its lowest levels since February.
The FTSE MIB also plunged on the open into bear market territory with markets still concerned about the continually fractious relationship between the Italian government and EU authorities, which appears to be heading towards some form of denouement between the deputy Prime Minister Salvini and the EU who appears to be gambling, in the style of the lines from a Kenny Rogers song “The Gambler” that EU authorities will probably back away from a confrontation, though it remains far from clear that markets will do the same.
“You got to know when to hold 'em, know when to fold 'em, know when to walk away, and know when to run.”
It is with these lines in mind that yesterday’s challenge to the bond markets, which Salvini doubled down on this morning, that the spread between Italian and German bond yields wouldn’t reach 400 basis points, is a fairly risky one given the deterioration in risk appetite in the last 24 hours, which could see a further unloading of Italian assets.
After this week’s spike above 3.7% on the 10 year yield, prices appear to have stabilised with yields holding steady just below 3.5% as spreads trod water below this month’s peak just above 3%.
In companies news high street retailer WH Smith (LON:SMWH) reported full year profits that missed expectations, coming in at £134m with high street sales the underperformer as like for like sales declined 3%. This has been a long neglected area for WH Smith management who appear to be more focussed an expanding the travel and international side of the business, having opened new overseas stores in Madrid and Rio de Janeiro airports.
To this end the company announced that it was closing a handful of high streets shops and pull back from projects like WH Smith Local as it looks to streamline its cost base. While this isn’t too surprising it also appears to show a tin ear to the company’s reputation on the high street where the company was again voted the UK’s worst high street retailer by “Which” magazine earlier this year. The lack of investment in this area of the business appears to be one of benign neglect and one can’t help thinking that the money spent on the announcement of today’s £50m rolling share buyback plan could be better spent here.
UK house builders have also plunged on the open after the latest RIC’s survey (Royal Institute of Chartered Surveyors) showed that London house prices could remain under pressure for quite some time. Barratt Development shares have dropped over 8% while Berkeley Group shares have also slid.
Airlines are also in focus, specifically British Airways owner IAG (LON:ICAG) after the CMA (Competition and Markets Authority) announced it was investigating its tie-up with American Airlines on transatlantic routes that has allowed it to operate as a single business on US routes to establish whether it breaches anti trust rules.
US markets look set to pick up where they left off last night in the wake of today’s continuation of selling pressure with further losses looking likely with the main focus set to be on the latest CPI inflation numbers for September. Yesterday factory gate prices in the US were rather mixed with one measure rising to 2.5% from 2.3% and a different measure declining from 2.8% from 2.6%.
If today’s CPI numbers come in ahead of expectations then we can probably expect to hear a lot more from the President Trump about the Fed’s rating hiking cycle. A softer reading of 2.4%, down from 2.7% could take some of the heat out of recent selling on the US bond market which has seen a bit of a rebound in the wake of the sell-off in stocks over the last 24 hours, with yields drifting lower from their recent peaks.
Dow Jones is expected to open 338 points lower at 25,260
S&P500 is expected to open 30 points lower at 2,755
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