We barely had time to sound the alarm bell a week ago… Stock markets turned south in the U.S. early on Monday ahead of the Federal Reserve interest rate decision at its last meeting of the year.
The 25bp rate hike (the fourth time this year bringing the Fed funds rate to a range of 2.25 percent to 2.50 percent), while widely expected, was not well received by market participants though this level remains quite low historically and relatively close to the inflation rate. To be honest, it could hardly be different. If Fed Chairman Jerome Powell had announced that the Fed was about to stop its quantitative tightening, it could have been seen as the signal that the economic picture is deteriorating and it would have given some ground for President Trump’s endless critics about the Fed hawkish policy bias. To make things worse, it seems that the latter has privately discussed the possibility of firing Jerome Powell (Saturday’s press coverage), a hardly imaginable and disastrous move that could lead to market rout even though stock markets have already entered capitulation mode due to the relentless flow of bad news (slower economic growth against the backdrop of trade war, lower profit expectations, part of the U.S. yield curve just inverted and last but not least, U.S. Government shutdown, as a Christmas gift!).
Unsurprinsignly, a vast majority of equity indices across the globe have slipped into bear territory (i.e. notching up the 20 percent peak-to-valley drawdown). The S&P500 and Russell2000 sank -7.05 and -8.52 percent respectively over the week (-12.45 and -15.73 percent Month-to-Date), underperforming European and Emerging Market indices (MSCI EMU -3.26 percent WTD, MSCI EM -1.50 percent WTD in USD). No sector was spared from the selloff. The worst performers were energy (-8.93 percent WTD) as oil prices continued to spiral lower with a drop of -10.96 percent at $45.49 for the WTI crude (QTD loss now close to -40 percent!), telecommunication services (-8.47 percent WTD) and consumer discretionary (-8.59 percent WTD).
Risk aversion has also hit credit markets hard (e.g. Barclays US Corp HY TR index down -2.36 percent WTD).
By contrast, the flight-to-quality was a boon to sovereign bonds, where U.S. 10-year yields struck their lowest since early April at 275bps before finishing the week at 279.
Find our full report here : https://www.trackinsight.com/weekly-flow-report/2018-12-21/global