Bloomberg / London
To the big-time buysiders, those investors more likely to check their portfolio by the season than the session, it was just another week. The S&P 500 still shows a big green number for 2019, after all.
Ditto the quants, with their multiyear horizons and programmed strategies. And hedge funds, whose nerves have been on show for a while now.
But for a host of investors, traders and analysts, last was the week markets finally woke up to a world of hurt.
President Donald Trump lit the touchpaper days before, signing an order effectively curbing Huawei Technologies Co’s access to the American market. The reaction was slow burn, but by last Monday US stocks were extending declines as major chipmakers prepared to cease business with the Chinese giant.
Tuesday’s respite – thanks to a partial walk-back of the ban – was brief. By Wednesday, more companies were in Trump’s sights, and more losses ensued. Thursday was a sea of red as the Asian nation hardened its own rhetoric. Friday’s bounce wasn’t enough to prevent a fifth straight weekly drop for the Dow Jones Industrial Average, the longest slump since 2011.
The move against Huawei – a metaphorical hand grenade in the heart of global tech – has forced market participants to ditch the rose-tinted glasses. Now that they have, not only does the prospect of a prolonged trade war confront them, but a heap of other stuff too.
Simmering tensions in the Middle East; a looming change in the UK government; impeachment clamour in Washington, and some familiar flash points in emerging markets. That’s an awful lot of risk at a time when many assets still look relatively expensive.
“The market needed an excuse to correct and the trade-war headlines were the trigger, but the underlying weakness is much more complex than that,” said Alberto Tocchio, the chief of Heron Asset Management, a Switzerland-based family office with 2.5bn Swiss francs ($2.5bn) under management. “A continuous deterioration of the macro environment, high valuations and political/geopolitical uncertainty are also importantly weighing on markets.”
Viewed from afar the US stock picture doesn’t look bad. The S&P 500 is about 4% from a record peak, still up 13% in 2019, and price swings – as measured by the Cboe Volatility Index – are higher than a month ago but still at about the one-year average.
But look closer, and the flaws and imperfections become clearer – and the biggest blemish is arguably the tech sector.
The Philadelphia Stock Exchange Semiconductor Index dropped 6% last week, on track for the worst month since the financial crisis. The Nasdaq 100 index is off almost 7% from its all-time peak at the start of the month. A gauge of the FANGs, – Facebook Inc, Amazon.com Inc., Netflix Inc and Alphabet Inc – has fallen faster still.
That’s all vital because the phenomenal performance of tech shares has underpinned the decade-long bull market. From trough to peak the Nasdaq 100 gained about twice as much as the S&P 500.
“Tech, communications and consumer discretionary look to me to be the three areas to avoid now,” said David Holohan, head of equity strategy at Mediolanum Asset Management in Dublin. “The outlook has certainly deteriorated because of supply chain worries particularly on the semiconductor side, and they’re only going to get worse.”
Nor is the pain limited to American shares. The three biggest stocks on the MSCI Emerging Markets index – Tencent Holdings Ltd, Alibaba Group Holding Ltd, and Taiwan Semiconductor Manufacturing Co. – are having a miserable month.
The developing world is another of those ugly marks in global markets just now. Alongside a crisis of confidence for foreign investors in Turkey, rhetoric between the US and Iran has been ratcheting up. Money has been fleeing the most-actively traded emerging-market ETF.
The doubts about tech have fed into a broader pessimism on Wall Street. Short interest as a percentage of shares outstanding on the largest S&P 500 ETF jumped as high as 7% last week, according to data from IHS Markit Ltd. That’s the highest level since 2015.
Part of the trigger back then was the prospect of interest rates rising for the first time in almost a decade. The Federal Reserve played its part in the market wake-up call last week, with minutes from the latest meeting showing policy makers in no rush toward easier policy, even as markets price in rate cuts.
There are many who argue moves in the stock market are largely decided by moves in the rates market. Since they both react to the same macro catalysts it’s hard to prove or disprove, but a chart of the S&P 500 and the yield on 10-year Treasuries for Thursday lays bare the close relationship.
Bond yields are marching lower amid increasing conviction that this tightening cycle is over, and the 10-year yield hit the lowest since 2017 in the week.
The heart of all this is not the trade war itself, but its potential impact on global economic growth. A slew of economists at Wall Street’s biggest firms and beyond took a bearish lurch last week, with the likes of Goldman Sachs Group Inc and JPMorgan Chase & Co rewriting forecasts for how bad the protectionist showdown will get.
“We will need to get used to the idea that the chances of a ‘good’ trade deal have decreased significantly and it will possibly not even get done,” said Tocchio at Heron Asset.
The timing is not ideal. Economic barometers worldwide have showed signs of softening, with data on Thursday showing a gauge of US factory activity dropped to a nine-year low. Beyond chipmakers, other companies also seen as proxies for growth have been struggling, leading the weekly drop.
If fears for the economy are increasingly visible in stock market, in the commodities market they are blinding. The Bloomberg Commodity Spot Index slumped the most since January on Thursday on its way to the worst week this year.
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