Tuesday, 3 April 2018

RISK AVERSION RETURNS AFTER EASTER BREAK

The fall in tech stocks and escalating trade tensions continued to rattle markets after the Easter break. The S&P 500 fell 2.2% on the first trading day of the second quarter, sending the Index back into correction territory (a more than 10% fall from its peak). Although investors are trying to adjust to higher volatility in equities, the close below the 200-Day Moving Average for the S&P 500 will likely bring more anxiety.

This is the first time since June 2016 the Index has closed below this key technical level, and the last time we had two consecutive trading days below the 200-Day Moving Average was in January 2016. Back then, the selloff was driven by the People’s Bank of China, which shocked traders by setting the official midpoint rate on the yuan against the dollar at its lowest level since March 2011. The news sent global stock markets tumbling as investors feared it would trigger a currency war and the S&P 500 crashed by more than 10% in less than a month.

This time, it’s Trump’s tariffs and tech stocks driving the selloff, and I don’t think the U.S. President is doing himself any favors before the midterm elections.  Beijing’s response hasn’t been aggressive, by imposing levies on $3 billion worth of imports from the U.S.; the question now is - what’s next?

A tariff ‘tit for tat’ is a lose-lose scenario. So, it’s likely that after this war of nerves, the world’s two largest economies will find a middle ground. Markets should get used to Trump’s negotiating style - kicking off with something dramatic, and then scaling down through negotiations.

Investors will turn their attention today to the Manufacturing PMI reports from the E.U. and U.K., to find out whether the stock selloff is justified by an economic slowdown.

If forthcoming data starts pointing out that economic growth has peaked after a strong period of synchronized global expansion, we’re likely to see further selloff in equities; otherwise, buying the dips will likely return, especially now that valuations are more attractive than when we started the year.

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