The recent sell-off in equity markets is a timely reminder of how inherently unstable the financial system is. The trigger, a larger than expected increase in Average Hourly Earnings in the US, cannot itself explain such a violent gyration.<\/p>\n
In fact, US Treasury yields have been steadily raising since the summer, when macro data clearly evidenced a positive economic momentum globally. With all major economies running at or close to full potential, and little slack in the labor market, higher real interest rates were to be expected.<\/p>\n
Overall, market observers have been circumscribing the problem of rising yields to the bond market, and have expected equities to continue performing positively on the back of earnings growth from a stronger economy. But you cannot have your cake and eat it too, and if rates rise faster than earnings, a compression in P\/E multiples becomes unavoidable.<\/p>\n
However, none of this can explain the violence of the recent sell-off. The explanation rather points towards a combination of technical factors (stop-losses, automated trades) behind the speed of the fall at the end of the trading session on Monday 5th.<\/p>\n
As we do not see any fundamental reason that would support a crash, we recommend to stay calm and take some time to assess whether the „Goldilocks scenario“ is dead and we are moving into reflationary territory, or if this is just a needed correction whilst the market digests how to price in a higher rate environment.<\/p>\n
Shortly after Alan Greenspan took over the reins at the Fed, he was confronted with the Black Monday Crash, when the Dow \u2013 inexplicably \u2013 dropped by 22.6%. Just getting off a plane, he rushed to release the following statement:<\/p>\n
„The Federal Reserve, consistent with its responsibilities as the Nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system“<\/em><\/p>\n This strong \u2013 though vague \u2013 message\u00a0helped to assure markets and avoid an economic crisis. However, it gave birth to an era of investor dependency on central banks; an addiction that has only worsened over the years. Jerome Powell was sworn-in as the new Fed chairman the very day the correction began; so stay tuned for his first dose of sugar to the markets after his first Monday in office.<\/p>\n <\/p>\n Fernando de Frutos, MWM Chief Investment Officer<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":" The recent sell-off in equity markets is a timely reminder of how inherently unstable the financial system is. The trigger, a larger than expected increase in Average Hourly Earnings in the US, cannot itself explain such a violent gyration. In fact, US Treasury yields have been steadily raising since the summer, when macro data clearly … Continued<\/a><\/p>\n","protected":false},"author":2,"featured_media":1386,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[132,326],"tags":[350,133,87,351,352],"class_list":["post-1387","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-macroeconomics-de","category-valuations-2","tag-black-monday","tag-central-banks-de","tag-fed","tag-market-correction","tag-treasury-yields"],"acf":[],"post_mailing_queue_ids":[],"_links":{"self":[{"href":"https:\/\/www.borealcm.com\/de\/wp-json\/wp\/v2\/posts\/1387","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.borealcm.com\/de\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.borealcm.com\/de\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.borealcm.com\/de\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.borealcm.com\/de\/wp-json\/wp\/v2\/comments?post=1387"}],"version-history":[{"count":0,"href":"https:\/\/www.borealcm.com\/de\/wp-json\/wp\/v2\/posts\/1387\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.borealcm.com\/de\/wp-json\/wp\/v2\/media\/1386"}],"wp:attachment":[{"href":"https:\/\/www.borealcm.com\/de\/wp-json\/wp\/v2\/media?parent=1387"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.borealcm.com\/de\/wp-json\/wp\/v2\/categories?post=1387"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.borealcm.com\/de\/wp-json\/wp\/v2\/tags?post=1387"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}