Financial Markets Look Ahead: Week of October 29, 2018
I had expected the markets to stabilize and slowly start moving up by the end of the last trading week (October 19, 2018), with both the Dow Jones and the S&P indices managing to stay above the close of the previous week (DJI:25,328; S&P: 2,767). However, the week closed below levels last seen in June/July (DJI:24,688; S&P: 2,659); all sectors closing low suggests a widespread selling of equities. The question then is: what can we expect next?
The trade war with China continues and we can expect some movement after the US midterm elections. One thing is for sure: the Chinese economy is getting hurt the most and last week reported a growth rate of 6.5%, one of the lowest in decades. The Chinese government, which had started to deleverage to contain ballooning debt has begun to reverse course, and last week announced a reduction of the bank reserve ratio, in a bid to stimulate the economy.
The Italian budget situation is simmering and if not handled deftly can certainly turn into a full-blown crisis. That said, we may not feel the impact of this for another three to four weeks.
On the Saudi Arabian front, as expected in last week’s report, the situation around the disappearance of journalist Jamal Khashoggi appears to be resolving itself with no action taken. I continue to expect to action against Saudi Arabia for their heinous act.
Though many US based companies have reported good quarterly results, Q4 guidance is moderated by multiple headwinds such as a strong dollar, increasing rate environment, elevated energy, and higher raw material costs associated with President Trump’s tariffs.
The US dollar continues to maintain its strength and is now close to its most recent high of 96.99 from about two months ago. Gold also tested a major resistance at 1240 but retreated to 1235. The 10-year treasury yield broke through a major support at 3.13 to settle at 3.09. This week is crucial for the dollar: will it break through the resistance at 96.99? If yes, how will that impact other macros? Crude Oil has been losing strength since October 3rd, after hitting a resistance at 77.35 (price last seen in November 2014). This was surprising given a full-scale Iran embargo will be imposed in about two weeks’ time. Does that mean demand for oil from China and other Asian economies is weakening? Shipping industry data hints this may be the case — a direct result of President Trump’s tariffs.
The S&P has been making lower highs and lower lows and is already in a correction zone, and without any economic tailwinds forthcoming, I expect the S&P to test the February low of 2581. I don’t expect the US equities markets to grow when developing markets have already been in correction territory for some time. For now, caution is the key word.
