Powell’s Black Monday
Andorra Expats | 03.05.2018 | Fernando de Frutos
The recent sell-off in equity markets is a timely reminder of how inherently unstable the financial system is. The trigger, a larger than expected increase in Average Hourly Earnings in the US, cannot itself explain such a violent gyration.
In fact, US Treasury yields have been steadily raising since the summer, when macro data clearly evidenced a positive economic momentum globally. With all major economies running at or close to full potential, and little slack in the labor market, higher real interest rates were to be expected.
Overall, market observers have been circumscribing the problem of rising yields to the bond market, and have expected equities to continue performing positively on the back of earnings growth from a stronger economy. But you cannot have your cake and eat it too, and if rates rise faster than earnings, a compression in P/E multiples becomes unavoidable.
However, none of this can explain the violence of the recent sell-off. The explanation rather points towards a combination of technical factors (stop-losses, automated trades) behind the speed of the fall at the end of the trading session on Monday 5th.
As we do not see any fundamental reason that would support a crash, we recommend to stay calm and take some time to assess whether the “Goldilocks scenario” is dead and we are moving into reflationary territory, or if this is just a needed correction whilst the market digests how to price in a higher rate environment.
Shortly after Alan Greenspan took over the reins at the Fed, he was confronted with the Black Monday Crash, when the Dow – inexplicably – dropped by 22.6%. Just getting off a plane, he rushed to release the following statement: “The Federal Reserve, consistent with its responsibilities as the Nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system”
This strong – though vague – message helped to assure markets and avoid an economic crisis. However, it gave birth to an era of investor dependency on central banks; an addiction that has only worsened over the years. Jerome Powell was sworn-in as the new Fed chairman the very day the correction began; so stay tuned for his first dose of sugar to the markets after his first Monday in office.
This article was published on Markets and Strategies, the monthly publication in which our experts at MoraBanc Asset Management analyze and give their vision of the most important international economic news.
Information on the processing of personal data
In compliance with Law 15/2003 of 18 December on protection of personal data, the customer authorizes that the applicant’s personal data entered on this form will be incorporated into files owned and managed by MORA BANC GRUP, SA – MORA BANC, SAU (hereafter referred to as “MoraBanc”) to process the requested service and, if necessary, to comply with the contracts finally entered into, and also to ensure correct operational procedures.
The applicant expressly authorises MoraBanc to send him/her commercial and promotional communications for products and services and information on the Bank itself, social or other activities, in hardcopy by post or by electronic means (among others, short messages (SMS) to mobile phones, e-mail, etc.). This consent can always be withdrawn, without retroactive effect.
The fact of filling out this form implies that the applicant acknowledges that the information and personal data provided are true, accurate and correct; otherwise, MoraBanc declines all responsibility for the lack of truthfulness or correctness of the data.
The applicant authorises the data provided to be communicated or shared with third parties forming part of the MoraBanc business group, entities which are primarily active in the financial, insurance and service sectors. The applicant is considered as having been informed of this transfer of information by means of this clause. The applicant accepts that he/she may be sent information on any product or service marketed by these companies.
The data processing manager is MoraBanc. The applicant is hereby informed that the rights of access, rectification, suppression or opposition may be exercised in the terms established in current legislation.
You may also like
