Market Update: Thursday, August 16, 2018


Daily Insights

  • No panacea for Turkey. Structural challenges including heavy reliance on external funding for its trade and fiscal deficits are unlikely to be fixed soon. However, there are several reasons not to expect contagion, including the Turkish central bank’s unused weapons to support its currency, potential support from the IMF, and possible investments from other countries (Qatari support already announced). Keep in mind that the Turkish economy is small and the amount of foreign-held Turkish debt is quite manageable at about $220 billion. A lot of risk has been priced in with the 18% correction in the MSCI EM Index from January highs, which we think may be overdone given generally favorable fundamentals for most major Emerging Market (EM) countries.

  • U.S.-China trade talks scheduled. U.S. stocks and emerging market currencies are getting a nice boost this morning on reports that the U.S. and China will resume low-level trade talks later this month. The American team will be led by David Malpass, undersecretary for international affairs at the Treasury, who is presumably less hawkish on trade than Peter Navarro and Robert Lighthizer and may help the tone.

  • EM earnings estimates have come down. Concerns about global trade and Turkey shouldn’t be dismissed as misplaced or paranoia. Though mostly currency driven, we have seen some signs of fundamental deterioration recently in the form of earnings estimate reductions for the MSCI EM Index. Specifically, over the past three months, EM estimates for the next 12 months have come down by 3.9%, while comparable S&P 500 Index estimates have risen 3.5%. We believe the combination of positive potential catalysts, solid-even if slightly slower-earnings growth, and low valuations justifies maintaining appropriate-sized EM equity allocations for suitable investors, which we’ll discuss today on LPL Research blog.

  • Global stocks endure choppiness. Equity investors globally have endured day-to-day volatility amid the turmoil in emerging markets, and the weakness has bled into U.S. stocks. The S&P 500 Index declined 0.8% yesterday, its fifth (and worst) drop in six sessions as investors dumped equities in the wake of contagion risk. The S&P 500 has now tumbled 1.4% since August 7, when it closed within 0.5% of a record high. While we believe U.S. stocks’ long-term uptrend is still in place (even amid the tenuous situation in emerging markets), we expect periodic volatility as global instability continues.

  • Economic data a mixed bag. The Philadelphia Federal Reserve’s business outlook survey fell to 11.9, a 21-month low (and below consensus estimates of 22), indicating slowing growth in regional manufacturing. While the outlook for survey respondents over the next six months was generally positive, respondents noted input prices increased while prices received fell. The Philadelphia Fed index backs up discouraging context recently that elevated prices and supply-chain constraints could weigh on manufacturing output. Housing starts grew 0.9% last month (missing expectations of 7.4% growth) after declining 12.3% in June, indicating cooling in U.S. new-home construction. However, applications for unemployment benefits fell to 212k last week, below consensus estimates for 215k. The 4-week rolling average for jobless claims is now 214k, hovering near its lowest point of the economic cycle. Declining claims confirm our view that the labor market is solid, and sits at or near full employment.


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