Weekly Update 10/12/2018 – Volatility Spike Sends Global Stocks Sharply Lower

US: S&P 500 Index -4.1%, Dow -4.2%, Nasdaq -3.7%
Europe: STOXX Europe 600 -4.6%, German DAX -4.9% France CAC 40 -4.9%, U.K. FTSE 100 -4.3%
Asia: Japan Nikkei -4.6%, China Shanghai Composite -7.6%, Korea KOSPI  -4.7%
Rates/Commodities: 10-Year Treasury yield -9 basis points to 3.15%, WTI crude oil -4.4%, COMEX gold +1.74%

Two days of benign moves to start the week gave way to another spike in volatility—larger than last week—that saw global equities tumble and defensive investments like gold move notably higher. U.S. stocks led the mid-week selloff with the S&P 500 Index and Dow each shedding more than 5% on Wednesday and Thursday, while the technology-heavy Nasdaq slumped more than 5% over the two-day stretch before buyers stepped back in on Friday. Multiple factors were attributed to the mid-week declines including: weakness in the bond market that saw the benchmark 10-year Treasury yield hit 3.25% for the first time since 2011, an uptick in U.S./China tensions, nervousness over the upcoming midterm elections, and worries about whether corporate earnings may have already reached the peak of this business cycle.

News that U.S./China trade talks will likely resume next month at the G20 summit, along with several major banks kicking off third-quarter earnings season with generally upbeat results, helped the S&P 500 halt a six-day slide on Friday. “These bouts of volatility can certainly be unnerving for investors, but we recommend focusing on the fundamentals,” suggested LPL Chief Investment Strategist John Lynch. “Corporate earnings growth is expected to remain strong in the third quarter amid a very healthy economic backdrop.” Get more insights from John in our special publications: podcast and video.

Foreign markets took their cues from the U.S., though investors in Europe also kept an eye toward next week’s deadline for euro-area countries to submit their budgets for review; Italy is of particular interest after government officials in the region’s third-largest economy approved deficit targets that are in breach of European Union (EU) thresholds. Stocks in mainland China fell the most among major Asian indexes. Comments from the country’s central bank leadership meant to reassure investors, along with a cut to banks’ reserve requirements, failed to pacify investors’ concerns about the mounting impact of U.S. tariffs and more data that continue to suggest economic growth may be decelerating.

Looking forward, third-quarter quarter earnings season picks up with 54 S&P 500 constituents set to report as the index looks to reverse three consecutive weeks of declines. On the economic front, U.S. retail sales and industrial production numbers, along with the much awaited FOMC minutes, should garner attention. Overseas, the EU’s Brexit Summit, kicking off on Tuesday, will highlight the European docket. In Asia, China’s third-quarter gross domestic product and industrial output figures are noteworthy. Track these and other important events on our Weekly Global Economic & Policy Calendar.

 

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