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Oct 11, 2018, by Lorcan Roche Kelly

(Bloomberg)

Stock rout

A selloff that sent U.S. stocks tumbling the most since February on Wednesday rolled across the globe. Overnight, the MSCI Asia Pacific Index dropped 3.4 percent, while China’s benchmark Shanghai Composite Index crashed 5.2 percent with more than 1,000 stocks falling by their daily limit. All but one stock on Japan’s Nikkei 225 Stock Average ended lower, while the Topix index closed down 3.5 percent. In Europe the Stoxx 600 Index had dropped 1.7 percent by 5:45 a.m Eastern Time as the gauge slumped to the lowest level in 21 months. S&P 500 futures pointed to more selling at the U.S. open.

Why now?

This selloff seems to have many fathers. Among the catalysts: Continuing trade war between the U.S. and China, falling margins and reduced profits for U.S. corporations, and the end of central bank accommodative policies. President Donald Trump seems to favor the last explanation. Yesterday he said the Federal Reserve had “gone crazy” and that too-tight policy was to blame rather than the standoff with China.

What next?

U.S. Treasury Secretary Steven Mnuchin told Bloomberg News in an interview at the IMF’s annual meeting in Bali, Indonesia that “the fundamentals of the U.S. economy continue to be extremely strong.” In judging whether this market move is a correction or something larger, it is always worth looking at haven demand, and so far there is very little. Gold is only slightly higher and there has not been a big move into Treasuries or the yen. Davide Serra, the founder of Algebris Investments, said global financial stocks are one asset that might be poised for outperformance.

Brexit obstacles 

Hopes of a deal on the U.K.’s exit from the European Union as early as next week remain high, even as some officials are warning that obstacles still need to be overcome. The European Union’s chief negotiator, Michel Barnier, said a deal is “ within reach” as negotiations over the thorny Northern Irish border seem close to resolution. The pound is trading above $1.3200 this morning amid the optimism.

Coming up

Inflation data for the U.S. for September is due at 8:30 a.m., with expectations for the core reading to have picked up to 2.3 percent, while the headline rate is expected to drop back to 2.4 percent. Also at 8:30 a.m. weekly initial jobless claims numbers are due. At 11:00 a.m. the EIA oil inventory report may show that oil inventories swelled by the most since February 2017, which would add to selling pressure on crude. The Treasury will test the market appetite at the long end around lunchtime with a $15 billion sale of 30-year bonds.



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