Equities bearish trend to finish a volatile week on the back foot

The Day So Far

Total carnage across equity markets both into the US close, with US equities having their biggest single-day selloff for 18 months, and then again when Chinese markets opened, the Shanghai Composite falling 5% and closing below its 8th July low. The catalyst this time was the release of the Caixin Manufacturing PMI, hitting it’s lowest level since 2009 and renewing fears that the world’s biggest consumer of commodities and the 2nd largest economy is slowing down significantly, far slower than the government’s stated goal of 7%. Of course, commodities have been signalling this for a while, but now it appears markets are really taking note and the overriding worry now is where the global growth is going to come from. If not from China, then Emerging Markets are also struggling, Europe remains weak and the US is limping along at growth rates far below pre-crisis levels. That this macro instability will likely lead to the Fed delaying plans to raise rates this September is no consolation, as earnings will fall and profit warnings will come along too.

As if the macro uncertainty wasn’t enough, Greek PM Tsipras announced yesterday that he was resigning and that fresh elections would likely take place next month. Support for his leadership has gradually waned in recent months to the point where he has lost the confidence of key members within the party and cannot count anymore on the support of his other leftist parties who have previously helped Syriza push through crucial reforms. Although the reforms have been passed and funding accessed, Grexit is back on the agenda if an ‘anti-Europe’ party wins, adding to the bearish sentiment across markets.

The Afternoon View

We favour a continuation of the bearish trend from yesterday and equities to finish a volatile week firmly on the back foot. Crude is just being weakly supported by the $40 handle, but we see this level breaking, perhaps the commodity can find a bottom from there, although any significant rally from here is unlikely with the supply/demand dynamics still weak, and it was interesting to note that Mexico today revealed it had forward hedged crude production at $49. This suggests that the upside from here is limited, at least in the short to medium term.