Equity markets enter sell-off phase; Trump slams Fed

Confidence wanes as US-China trade war lingers on

KUWAIT: An unhappy US president and a tumbling stock market. This was the theme of the week as equity markets entered into a sell-off while suffering their worst fall in eight months. The recent interest rate rises undercut popular trading strategies and sent the shares of the once high-flying technology stocks falling. The Dow fell more than 800 points, while the S&P tumbled more than 3 percent in its worst day since February.

Tech-heavy stocks were hit the hardest as the Nasdaq Composite dropped more than 4 percent, its biggest one-day decline since June 2016. Last week also saw the global FTSE All-World index recoil for a sixth day running, erasing all of 2018’s gains in one of its worst weeks of the year. The selling streak did not seem to slow down given that investors had many aspects to worry about: the US-China trade war, rising yields, waning confidence, and the VIX volatility index spiking to nearly 30 points, its highest level since the market mayhem of early February. As the global selloff spread, Asian markets tumbled on Thursday as well.

Japan’s Topix index was down 3.4 percent just shortly after markets opened. In Hong Kong, stocks also dropped 3 percent. The equity sell-off looks to be triggered by the rise in bond yields which reached a seven year high of 3.26 percent. Furthermore, the hawkish tone of Fed officials forced investors to reappraise their optimistic outlook for further interest rate increases.

On Friday, the sell-off showed signs of a slowdown in Asian markets, while the 10-year US Treasury retreated down to 3.14 percent. Tokyo’s Topix was down 0.5 percent versus the 3.4 percent drop in the previous session, while Hong Kong shares were up 0.4 percent in early trading. Early futures trading also indicated a more positive open for equities in London and New York, with the FTSE 100 set to open flat and the S&P 500 expected to rise 0.6 percent.

The stock market decline brought along public criticism from president Trump who claimed the US Central Bank’s commitment to raising rates is a mistake. President Donald Trump showed strong disagreement with the hawkish Fed, he went as far as saying that the Fed has gone crazy. “They’re so tight. I think the Fed has gone crazy,” the president said. It is typical for presidents to refrain from commenting on the Fed’s decisions in order to emphasize its independence from political pressure, but Trump has been frequently voicing his opinions on the Fed’s actions. He did say that he was “disappointed” in the Fed’s chair Powell, but ensured that he was not thinking of removing him. According to Trump, the “ridiculous” policy is making it more expensive for his administration to finance its escalating deficits.

Rising US producer price index

The US producer price index advanced for the first time in 3 months reporting a 0.2 percent rise in September. The PPI figures came in line with forecasts and saw a recovery from the unexpected 0.1 percent drop in August. The increase was mainly attributed to a 1.8 percent rise in transportation and warehousing services. Overall however, the cost of goods reflected a decline in both food and energy by 0.1 percent. Service prices were able to offset the drop by increasing 0.3 percent. The core PPI which excludes food, energy, and trade services recorded its highest growth since a 0.5 percent increase in January, rising 0.4 percent last month.

The dollar continued to lose ground after an incredibly strong week, as both the sterling and yen gained against it. The greenback closed the week down 0.5 percent at 95.259.

US consumer price inflation In reinforcement of the Federal Reserve’s judgment to carefully proceed with further short-term interest rate hikes, the US recorded steady consumer price inflation in September. Both CPI and core CPI increased 0.1 percent last month after rising 0.2 percent in August. A drop in fuel and energy costs slowed headline CPI to 2.3 percent from a year earlier, down from the 2.7 percent we saw in August, making it the slowest growth since March. Core CPI, which excludes volatile food and fuel prices held a steady 2.2 percent year-on-year price growth. It is firmly upping its last year performance, when it was rising at a 1.7 percent year-on-year pace. This combined with unemployment hovering at its lowest level since the 1960’s could be forcing the Fed to tighten policy more aggressively. Yet, Fed Chair Powell has been signaling that he has no appetite to accelerate the pace of rate rises given the expectations for continued soft inflationary pressures.

UK & Europe recovering UK GDP

In the UK, growth has appeared to recover from the difficult start to the year as the summer brought along a boost in the economy. The Office for National Statistics reported on Wednesday that GDP rose 0.7 percent in the 3 months ending in August, beating expectations of 0.6 percent. Construction activity rose 2.9 percent over the 3 months, while production rose 0.7 percent. However, the summer boom cannot deny the stagnant overall growth, as ONS official Rob Kent-Smith explained: “The economy performed particularly well during the hot summer months”, adding “However, longterm growth continues to lag behind its historical trend.”

Brexit deal in the horizon

We are now in the period of the highest stakes on Brexit since the UK’s 2016 EU referendum. A breakthrough is expected as negotiators are planning to agree a complete draft treaty before the end of the weekend. The agreement should define the terms of Britain’s departure, a 21-month transition, and the solution to Northern Ireland’s border conundrum, with the latter seeming to be the most challenging issue. The Democratic Unionist party in Northern Ireland has threatened to vote against the UK government’s budget if their “red lines” over any form of Irish border are breached. A senior DUP figure said: “It is unacceptable that we would be treated differently to the rest of the UK. We will not be bounced into anything. If Theresa May doesn’t take our concerns on board, she may not be the leader to take us through Brexit.”

On Thursday night, Theresa May briefed her inner cabinet that a historic Brexit deal is close. An official to the Brexit talks said: “The prime minister never brings the cabinet together to tell them what’s going on. That’s not her style. It feels to me like the deal is practically done.” Cabinet ministers said that the issue of the Irish backstop was close to being settled.

In response to the optimism towards a potential Brexit deal and a recovering GDP, the sterling rose, the week up 0.18 percent at 1.3147.

US-China trade wars

If Beijing does not produce a detailed list of concessions, Donald Trump will not engage in trade talks with Xi Jinping at next month’s G20 summit, warned US officials. The Chinese are saying that they do have such a list, but they are not willing to produce it without a guarantee that it will be received in a stable political environment in Washington. They are demanding a point person with a mandate to negotiate on behalf of the Trump administration. Earlier in August, Chinese negotiators mentioned a possibility of an agreement on around a third of the demands in a relatively quick manner, and willingness to engage in discussions on another third. They added that the remaining third were off limits due to concerns of national security. Chinese officials were prepared to present a detailed response at a fifth round of trade talks last month, but those discussions were cancelled after Trump added tariffs on more than half of all Chinese exports to the US. Officials now are saying that they need China’s response well in advance of the G20 summit in order to pave the way for practical trade discussions between the two leaders.

Kuwaiti dinar USD/KWD opened at 0.30300 yesterday morning.