The 116th episode of my weekly YouTube show where I discuss what is happening in investment markets and what to look out for. This week I look at the continued weakness in Chinese technology stocks as well as Japanese stocks and what it could mean for western stock markets. Plus I look ahead to the latest policy decision from the US Federal Reserve.
Each show lasts between 5-10 minutes and is aimed at DIY investors (including novices) seeking contemporary analysis to help them understand how investment markets work.
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Abridged transcript - Midweek Markets episode 116
Hello, and welcome to the latest episode of Damien's midweek markets, the show where I talk about what's been going on in investment markets and what to look out for in the days and weeks ahead.
Now, let's start with the 10 year US treasury yield as it's been the one thing that's really been leading equity markets a merry dance in recent months. Now, despite more toing and froing from the 10 year US treasury yield it is currently sitting just above its 200-day moving average at 1.26%. So given this stability, perhaps it is unsurprising that we’ve seen most developed markets move higher between approximately 0.5% & 1% in the last week.
Now, that doesn't mean that equity markets have been completely calm this week and without incident at all. If you look at Asian equities and emerging market equities as a group, then they are down 5.5% and 4.5%, respectively since last time, which is a significant move.
Now, the reason behind this move is that Chinese authorities have clamped down on a range of sectors in China, particularly some of the big tech companies whose share prices have been hit quite hard as a result. If you look at Tencent, in particular, its share price is down around 20% in the last three days, and Alibaba is down around 10% over the same period. These are huge moves. Given that Chinese equities, and these stocks in particular, make up quite a portion of some of the Asian equities and emerging market equity indices it’s no wonder we’ve seen them fall over the last week.
Often, when you see big Chinese tech stocks get hit it can be contagious for US technology companies. Initially, there had been concern that we could see weakness in US technology stocks but most analysts think the slump in Chinese technology stocks won't spark a similar slump in US technology stocks. But having said that, yesterday we did see US technology stocks take a bit of a hit. The tech-heavy Nasdaq 100 fell as much as 2% during the day but this was much smaller in size than the moves we’ve seen in China.
So is that it for US technology stocks, is the wobble over? As I make this show we're waiting for US equity markets to open today to see what will happen after yesterday's sell-off. Don't forget that in the last 24 to 48 hours we've also had some earnings reports from technology companies like Microsoft, Apple, and Alphabet (Google). On the whole, US tech earnings have been strong again over the last quarter. But if you look at pre-market share price moves for today it looks like we could still see technology stocks open slightly lower. The fate of US technology stocks is important because they’ve been leading the market higher at the same time as we've seen a narrowing of breadth in US equities and most equity markets globally.
Going back to Asian equities, they remain an interesting universe at the moment and particularly Japanese equities. That’s because there's been a slump in Japanese equities since the February high. It's been a slow-motion correction of 10% since February, while at the same time we've seen a slump in the yield of the 10 year Japanese government bond (JGB). Now that's possibly pointing towards a shift in the Japanese economic cycle towards slower economic growth, following the rebound after the pandemic, and a period of deflation.
So this goes to show that if the market starts to anticipate a similar change in the economic cycle in the US, Europe or the UK then we could see a similar pattern emerge in their respective equity markets.
Now, interestingly, the IMF came out today and upgraded the forecast for UK growth in 2021 to 7%, which would make it one of the fastest-growing economies in the G7. That is obviously positive news which is one of the reasons why the FTSE 250, with its significant exposure to the UK domestic economy, is pushing towards a new record high today.
However, the big story in the next 24 hours is going to be the US Federal Reserve’s announcement of its latest monetary policy decision. While no one is expecting any change to monetary policy, but if there is then we could see a market wobble. Much also depends on the Fed’s rhetoric around inflation. Some analysts are even suggesting that this could be the meeting when US bond yields finally start to break higher again after their recent slump.
So I suggest, if you're looking at your phone app later on today, have a quick look at your stock app, have a look to see what the NASDAQ, S&P 500 and the Dow Jones are all doing and what the 10 year US treasury yield is doing. If you see some wild moves there, then you know that the US Federal Reserve and/or Jerome Powell have said/done something which has shocked markets.