What’s the outlook for markets the second quarter?

William Hobbs, head of investment strategy at Barclays, talks to IGTV’s Victoria Scholar about the outlook for markets in the second quarter.

Volatility replaces complacency in first quarter

During the first quarter of 2018, the S&P 500 posted its first quarterly decline since 2015. The equity declines extended to Europe and Asia, with the FTSE 100 shedding 8% and the Nikkei 225 closing the quarter down 5.75%.

Bonds markets faced difficulties of their own. The yield on the 10-year treasury bond posted the biggest quarterly jump since 2016, and the spread between the 2-year and 10-year yield narrowed to a ten-and-a-half year low.

William Hobbs, head of investment strategy at Barclays Investment Solutions, says ‘short-term US interest rates have risen higher than their longer-term equivalent before every US recession since 1950, with a lead time of around one to one-and-a-half years.’

But Hobbs takes the fact that the yield curve is yet to invert as an encouraging indication. He says a flattening yield curve is insignificant in terms of its ability to predict a recession and it is only an actual inversion that has true substance.

What’s in store for the second quarter?

The second quarter of 2018 started where the first quarter left off, with volatility high amid fears of an escalating trade war between the US and China, as well as fears over technology stocks. US equity markets had the worst single-session start to April since the Great Depression.

Read more about how a US-China trade war could impact the markets.

The analyst team at Charles Schwab thinks we should be welcoming the volatility, describing the market as a ‘bunny market’, because it hops up and down.

Barclays’ Hobbs says higher volatility is something we must just come to accept.

Time to jettison tech?

65% of the US tech sector, including Google’s parent company Alphabet, is currently trading in correction territory, according to Market Watch. That means the stocks are trading 10% or more below their 52-week highs. Facebook is in bear market territory, meaning it is 20% or more below its 52-week high.

The question is whether the sell-off represents a good chance to buy into weakness or whether there’s more pain ahead for the tech sector. Hobbs says he is not too concerned about the outlook for the tech sector because he believes there is an underlying strong demand story, citing strong Korean trade statistics produced over the weekend, with semiconductor shipments hitting all-time highs. He says this is a good lead indicator for wider tech demand.

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This information has been prepared by IG, a trading name of IG Markets Limited and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. International accounts are offered by IG Markets Limited in the UK (FCA Number 195355), a juristic representative of IG Markets South Africa Limited (FSP No 41393). South African residents are required to obtain the necessary tax clearance certificates in line with their foreign investment allowance and may not use credit or debit cards to fund their international account.

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