Higher rates: This being so, it warrants an examination on the state of play. US equities – the shining beacon atop the dimming global financial landscape – became hobbled about a fortnight ago after a slew of US Federal Reserve speakers came-out to implore that growth was so “extra-ordinary” that interest rates may not yet be near the “neutral rate”. Not only that, the US economy could run so hot that a move in rates above the “neutral rate” may be required, to lean on a booming US economy. Bond markets responded violently to the new information – as is well known – with traders demanding higher yields on US Treasuries, sending the USD higher, stretching US stock valuations in certain segments of the markets to unattractive levels, and generally denting risk appetite.
Slower growth? Though such structural challenges reared their head, the initial reactions from investors were on-balance positive: the Fed needs to raise rates because the US economy is just that strong. This is a positive thing, it was rationalized: fundamentals are good, so the bull-market should continue. This idea became challenge this week for US investors, as dark clouds started to brew on the eastern horizon: China looks as though it could be slowing, and the trade war could make this worse. A world of slower Chinese growth is a world without a strong economy; and that means, for the many US corporates exposed to the slings and arrows of China’s outrageous economic fortunes, lower profits and lower returns for their shareholders.
Panic-stations: With this as the very simple fundamentals, momentum in the US equity market slowed-down, probably as flow-chasers exited the market, robbing equities of their bid and beginning the cascade in prices that we’ve witnessed the last 48 hours. Frenzy has of course ensued, as investors bank profits where they can and take advantage of the gains the mighty bull-run on Wall Street has delivered. The panic has naturally spread to equity markets throughout Asia and to Europe, sparking calls that the divergence in US markets and the rest of world – that has characterized months of trade – is coming to an end: the last bastion of strength in the post-GFC, easy-money-era bull run is falling.
Trend reversals and new lows: Trend lines and support levels are being broken everywhere you look. The global recovery (good since March) following February’s massive correction has ended. Chinese and Hong Kong markets have hit new lows, on some indices ones not seen since 2014, even despite very attractive valuations. Japan’s Nikkei has tumbled from 27-year highs to wallow back around the low-22,000-mark. European shares are on the precipice of breaking-levels that would open downside to near-12-month lows. And the ASX is hugging an upward trendline resistance level established in early-2016, when the global growth story was barely a twinkle in the global economy’s eye. Here, the bears have begun to circle, waiting to profit from a massive, long term trend reversal that vindicates the widely held view that markets can’t possibly prosper without central bank support.