The 136th episode of my weekly YouTube show where I discuss what is happening in investment markets and what to look out for. This week I talk about the contrast of the US and UK stock markets and whether the weakness in US equities is likely to bleed over to this side of the Atlantic.
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Abridged transcript - Midweek Markets episode 136
This trading week has been a slightly shortened one in the US due to markets being closed for Martin Luther King day. But when US markets did reopen on Tuesday the sell-off in US treasuries was reignited. If you recall last week I explained how the rally in bond yields, as investors placed bets on higher inflation and therefore higher interest rates, had sparked an equity market tremor with the epicentre in US technology stocks.
By that point, the Nasdaq 100 was down 2.54% while the S&P 500 was down almost 1% since the start of the new year. Meanwhile, European equities were broadly flat while UK assets were the standout performers. The FTSE 100 was up 2.26% and I asked the question of whether 2022 will finally be the year when UK and European equities outperform US equities? Something that has only happened once for UK equities in the last 10 years.
But by Tuesday this week (which was yesterday) investors seem to ratchet up their bets on the level of monetary tightening that the US Federal Reserve will be forced to take. It certainly seems as if the bond market has finally begun fully pricing in four rate hikes from the Fed this year. Previously the projections from Fed policymakers had been for three rate hikes in 2022. But some quarters (namely the chief executive of JPMorgan) have even suggested that there is a pretty good chance of more than four rate hikes, and even as many as six or seven. It’s unsurprising then that the 10 year US treasury yield has hit 1.9% today. Its highest level since December 2019.
The repricing of the bond market, the most liquid and largest of investment markets, lead equity markets lower. Technology stocks took a renewed hammering (in a now-familiar pattern that I’ve described in recent weeks). The Nasdaq 100 tumbled a further 2.6% on Tuesday meaning it had fallen more than 7% in 2022. The wider Nasdaq Composite crashed down through its 200 day moving average which is traditionally a very bearish sign. But while the stress is finally showing at an index level US stock markets have been showing signs of weakness beneath the surface for a while.
Right now 70% of the stocks in the Nasdaq Composite are down 20% or more from their recent highs while 40% of stocks within the index have fallen more than 50%. Until now the big tech stocks that drive most of the index’s performance have obscured what has been happening beneath the surface. The Nasdaq Composite is just a hairsbreadth from a technical correction which means a 10% fall from recent highs. But the weakness in equities hasn’t just been confined to tech stocks, for example on Tuesday every equity sector in the US, except energy, was down on the day.
What has also compounded matters was the price of oil hitting a 7 year high, as geopolitical tensions in the Middle East and Europe threaten to disrupt oil supplies in Russia and the United Arab Emirates. This has pushed inflation expectations higher and seen Russian assets slump in recent days. Russian stocks have fallen 14% in just four trading days over fears that Russia may be planning a renewed invasion of Ukraine. Meanwhile, new Chinese Covid restrictions are posing a threat to global supply chains once again, fueling inflation concerns. While recent corporate earnings announcements have been underwhelming.
On the latter, we have now entered earnings season where investors focus on the Q4 earnings announcement of companies particularly in the US and Europe. As is traditional in the US a number of banks kicked off earnings season at the end of last week and at the start of this week. But a number of disappointing reports saw bank stocks slump. JPMorgan Chase and Goldman Sachs fell by over 6% after their earnings were released. Ironically bank stocks and financials have been the very stocks that investors have been rushing into as part of the reflation trade rotation.
The disappointing earnings surprised the market and pulled the rug from under it. This then became more than just a higher rate/ reflation trade story. Concern began growing that central banks will raise interest rates too aggressively in 2022, especially in the US and kill the bull market. Something I said last week that currency and bond markets were already starting to point the finger at. This week, it seems that equity investors are starting to play catch-up. But earnings season has only just started so in the coming days and weeks, this is likely to influence the market direction in the short term, whether that be good or bad we will have to wait and see.
But once again, the pain isn’t being felt in the UK despite political issues in Westminster. Right now the FTSE 100 is up 2.45% year to date versus -4.2% on the S&P 500 and -7.04% on the Nasdaq 100. But interestingly Asia and emerging markets, as a group, are just about keeping their heads above water. Meanwhile, the broad measure of global stock markets the MSCI ACWI is down over 3%.
The question still remains as to whether the weakness in US equities will bleed over to this side of the Atlantic. History suggests that it will eventually if it continues. The bull market and uptrend in US stocks is a little bloodied and is being tested and what happens next matters to the world. We’ve broken back below 4600 again on the S&P 500 so keep your eyes on the December lows of 4500 to 4530 if this weakness continues. That would be a logical place for buyers to come back into the market if they are going to.