Is it the be­gin­ning of the end?

Financial Mirror (Cyprus) - - MARKETS - Mar­kets Re­port b

eco­nomic data af­ter wage growth grew 2.9%, sug­gest­ing that in­fla­tion­ary pres­sures were build­ing, and the Fed would need to tighten mone­tary pol­icy faster.

This time around it doesn’t seem a lot dif­fer­ent. The only dif­fer­ence is that the re­ac­tion to higher in­ter­est rates was a lit­tle de­layed.

Bond yields have spiked 40 ba­sis points on the 10-year Trea­suries since the be­gin­ning of Septem­ber. This has called into ques­tion the val­u­a­tion of many growth stocks, par­tic­u­larly Tech. It shouldn’t be very sur­pris­ing to see this kind of re­ac­tion when the re­quired re­turn of eq­uity, a key com­po­nent in eq­uity val­u­a­tions, soars in a short time frame.

So far, we may de­scribe the sell­off as profit tak­ing with many in­vestors re­con­sid­er­ing their as­set al­lo­ca­tion weight­ings in their port­fo­lios. Some in­vestors will also be watch­ing key tech­ni­cal lev­els, given that the S&P 500 is test­ing the 200 days mov­ing av­er­age. This key sup­port level has been tested three times in 2018 and man­aged to bounce again higher. How­ever, a close be­low for two or three days may in­ten­sify the sell­off for a cou­ple of more days.

“The prob­lem in my opin­ion is Trea­sury and the Fed. The Fed is go­ing loco and there’s no rea­son for them to do it. I’m not happy about it”, said U.S. Pres­i­dent Don­ald Trump.

While I agree with Pres­i­dent Trump that Wed­nes­day’s sell­off is the fault of the Fed, he should be re­minded that the trade war he started with China and re-im­pos­ing sanc­tions on Iran is also to blame. His ac­tions helped build­ing in­fla­tion­ary pres­sures and the Fed can­not stand still when it sees the econ­omy over­heat­ing. A steeper sell­off in eq­uity mar­kets will prob­a­bly lead to a pause in hik­ing rates, but the Fed will be more con­cerned about the over­all econ­omy per­for­mance than just eq­uity prices.

Now it’s up to the earn­ings sea­son which kicks off on Fri­day to con­vince in­vestors that earn­ings are still ro­bust and the out­look is rosy.

If cor­po­rate Amer­ica paints a gloomy pic­ture due to trade dis­putes, higher im­port prices, a stronger dol­lar, and other vari­ables, this will con­firm that stocks have topped out for 2018.

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