The decline in the global equity market is the most serious since the February and March spill. In this Great Graphic, the white line is the S&P 500. With the setback, it is up a little more than 8% for the year. It managed to recover fully from the sell-off earlier in the year.
The fuchsia line is the MSCI World Index of developed countries. It is up 1.25% year-to-date, and it never managed to take out the high set earlier this year. This primarily reflects the underperformance of Europe.
The green line in the MSCI Emerging Markets. It is off about 13% this year and has trended lower since Q1. As the chart show, the real underperformance of emerging markets and outperformance of the S&P 500 began late in Q2.
It is too early to tell if the recent slide will produce new convergence. Some argue that US rates breached some threshold for equity investors, but we are not convinced this is the case. A rise in rates has been widely expected and did not prevent the S&P 500 from setting record highs on September 21, when the 10-year note yield closed above 3.05%. The S&P 500 was still near record highs on October 3, when the 10-year yield was at 3.18%.
The MSCI Emerging Market Equity Index can bounce. It seems to be a pattern of making new lows and then staging a recovery, perhaps on short-covering, before heading south again. One day a trend does not make. It is difficult for many to turn positive on EM unless there is a shift in the dynamics. Valuation measures alone are not sufficient.
Europe has at least three pressing vulnerabilities. Italy's fiscal policy, Brexit, and loss of economic momentum. None can be resolved immediately, ECB President Draghi's optimistic economic assessment is predicated on the strength of the labor market. Investors are likely to be particularly sensitive to disappointing readings. As noted before, the political leadership in Europe is weak, and CSU loss of its majority in Bavaria yesterday is a reflection of the political flux and potential realignment taking place.
Opinions expressed are solely of the author’s, based on current market conditions, and are subject to change without notice. These opinions are not intended to predict or guarantee the future performance of any currencies or markets. This material is for informational purposes only and should not be construed as research or as investment, legal or tax advice, nor should it be considered information sufficient upon which to base an investment decision. Further, this communication should not be deemed as a recommendation to invest or not to invest in any country or to undertake any specific position or transaction in any currency. There are risks associated with foreign currency investing, including but not limited to the use of leverage, which may accelerate the velocity of potential losses. Foreign currencies are subject to rapid price fluctuations due to adverse political, social and economic developments. These risks are greater for currencies in emerging markets than for those in more developed countries. Foreign currency transactions may not be suitable for all investors, depending on their financial sophistication and investment objectives. You should seek the services of an appropriate professional in connection with such matters. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete in its accuracy and cannot be guaranteed.
Recommended Content
Editors’ Picks
EUR/USD drops below 1.0800 after German Retail Sales data
EUR/USD has come under fresh selling pressure and trades below 1.0800 after the data from Germany showed that Retail Sales declined by 1.9% MoM in February. Resurgent US Dollar demand is adding to the downside in the pair. US data are next in focus.
GBP/USD stays weak near 1.2600 amid market caution
GBP/USD remains defensive near 1.2600 in European trading on Thursday. The hawkish tone from Fed Governor Christopher Waller keeps the US Dollar afloat amid a cautious trading environment ahead of key US data releases and the Good Friday trading lull.
Gold price bulls keenly await US PCE Price Index on Friday before placing fresh bets
Gold price (XAU/USD) continues with its struggle to make it through the $2,200 mark on Thursday and oscillates in a narrow trading band through the early part of the European session.
XRP price falls to $0.60 support as Ripple ruling doesn’t help Coinbase lawsuit against SEC
XRP programmatic sales ruling by Judge Torres was completely rejected by another US Court that ruled in favor of the SEC in a lawsuit against Coinbase.
The other terminal rate: How far will policy rates be cut?
Recent communication by the Federal Reserve and the ECB has made it clear that the first cut in official interest rates is coming. Both central banks are saying the same but the ECB communication is more opaque than that of the Fed.