Weekly Market Update: Oil prices fall and Tech leads US equities lower

Mon 26 Nov 2018

Read our full Market Update Week 47

Market Update

Equities fell across the globe last week, with the US suffering the largest decline as technology mega-caps sold off. Facebook is down over 25% year-to-date, suffering from both idiosyncratic factors, such as an ageing user base and political scandals, and sector specific issues such as regulation. Emerging Market equities fell -1.65% in Sterling terms, Japanese stocks were down -0.67% and EU stocks were down -1.71%. European banks have been struggling recently and Deutsche Bank shares now trade for less than €9. UK equities held up well compared to other developed markets, falling -0.87%. Sterling was flat over the week despite continued Brexit uncertainty. The US 10-Year Treasury yield closed at 3.04% on Friday, as capital flowed in to the government bonds as investors bought ‘safe haven’ assets. Oil prices fell significantly, breaching the $60 level on Friday, as supply remained high and global demand fades.

CIO Analysis

Risk aversion was widespread last week: stocks fell as the US tech sector re-rating continued, credit spreads widened and investors flocked to sovereign bonds for safety. In Europe, CDS spreads climbed as Italian risk began to spillover and the possibility of a “No Deal” Brexit unsettled investors. There are three factors at play: the removal of accommodation, a Chinese slowdown and political volatility. The latter two, China and politics, have cyclical characteristics. The likelihood of Theresa May passing the Brexit Bill through parliament is significantly higher than last week. The major issue facing investors is the Fed hiking rates. Fed hawkishness has not been an investment consideration for nearly a decade. Investors were not prepared for a scenario of a burning US economy and rising rates, the reason behind the repeated market convulsions since the changing of the Fed guard in February. At this point, volatility seems to be about cyclicality and adjustment, not about loss of faith, the defining feature of cycle ends. This cycle still features a strong economy, a robust financial system with improved insulation from systemic risk, and the legacy of over $8trn in new wealth since 2008, the effect of which will take a long time to wear off.

David Baker, CIO