Overview: Yesterday’s bounce in US equities may have been another bear trap as several tech favorites reported disappointing earnings after the close Asian shares fell with Hong Kong, Korea, and Singapore markets losing more than 1% today. The MSCI Asia Pacific Index is lower for the fifth week, during which time it has lost around 12%. The MSCI Emerging Market index has lost about 10% during the five-week slide. Europe’s Dow Jones Stoxx 600 is also off about 10%, having fallen in four of the past five weeks. Coming into today’s session, where the early call is for than a 1% decline at the opening, the S&P 500 has also fallen in four of the past five weeks, for about an 8% decline. Weak stocks appear to have helped give bonds a bid. Core bonds yields are mostly one or two basis points lower. The US 10-year yield is slipping below 3.10%m representing a 10 bp decline on the week. The decline was matched or bested by the UK, Spain, Australia, and New Zealand. In the foreign exchange market, the US dollar is firm against the majors (except the yen) and most emerging market currencies (the notable exceptions being the Philippine peso and the onshore Chinese yuan).
Equities: The continued drop in equity prices is nearly overwhelming other drivers of the global capital markets. Most diagnoses seem to focus either on the earnings outlook (peak) or the rise in interest rates. Some link it to Fed chief Powell observation earlier this month that the Fed target was far from neutral, which implied a sustained campaign of hikes. Others suggest that de-emphasizing “r*” conceptually removed an anchor of monetary policy. A few economists are pointing to the Fed’s balance sheet reduction as gradually pushing of the effective Fed funds rate higher within the target. Meanwhile, Clarida, the new Vice-Chairman of the Federal Reserve, appointed by Trump, was upbeat on the economy yesterday and fully endorsed the Fed’s path of gradual rate hikes. This seemingly suggests that the Fed’s independence remains intact despite the unorthodox public criticism by the President.
