Weekly Market Update: Stocks sink as the Fed disappoints traders

Mon 05 Aug 2019

Market Analysis

This week saw stocks suffer globally, with global stocks down -1.1% in Sterling terms. US equities suffered their worst week thus far in 2019 as market sentiment was dealt twin blows by disappointing signals from the Fed and the announcement of new tariffs on imports from china. US equities were down -1.2% for the week. UK, European and Emerging market equities were down -1.9%, -1.2%, and -2.4% respectively. Sterling is approaching multi-decade lows, driven down by rising fears of a disruptive no-deal Brexit. Although the pound is approaching parity with the euro, historically this is a limit it has never crossed. Sterling fell below the $1.21 level last week. The UK 10Y Gilt yields were down -13.7bps and US 10Y Treasury yields were down -22.5bps. Gold was up +3.5% in sterling terms, and Oil fell -1.0%, with West Texas Crude closing the week at $54.5 per barrel.

CIO Analysis

Powell’s not-so-dovish comments were probably the only event more predictable than Trump’s pressure on China -or “severe Circle Line delays”… Yet Pavlovian investors gave the Dow its’ worst 2019 week.

Thoughts:

1. Efficient markets should be able to predict what’s… predictable. Failure suggests myopia and trend following, an unavoidable consequence of algorithms.
2. Most managers are looking at the same factors & macro catalysts, especially Fedspeak. Most are on holiday. So, we are probably experiencing a similar setting to last December’s when computers called the shots. Long term investors should probably drop the newspapers and pick up books, ignoring short term noise.
3. The “Market” is an all encompassing generalisation. There are managers who are neither passive or purely mathematical and who can profit from mis-pricings that are borne when indices don’t move on fundamentals.
4. The Fed will respond to significant market moves but not to traders expectations or the threat of volatility. So, when volatility doesn’t spike, we should be listening to the Fed. When losses exceed thresholds then the Fed caves.
5. August is month of low volumes, occasional market movements and noise. September is a better gauge of investors’ mood.

– George Lagarias, Senior Economist