Many analysts highlighted the tech-heavy US Nasdaq index, which has risen by around 40% over the past couple of years driven by major companies such as Facebook, Amazon, Apple, Netflix and Google. But, following last week's surge in US bond yields, investors were now forced into a rethink as valuations came under pressure due to heavier discounting, which lowers the present value of future cash flows seeing share prices fall. With investors reconsidering asset allocations, volatility in financial markets increased; the key measure of this, the US VIX, lifted to highs since April.
Locally, analysts put forward a similar thematic for driving the ASX200 index to its most severe weekly decline (-4.69%) since January 2016. In this context, 'growth' stocks, including the likes of CSL, Cochlear (Healthcare), Macquarie (Financials), A2 Milk (Consumer Staples) and Afterpay (Tech), that have driven gains in the local index were marked down heavily.
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Going back to last Friday, the latest US employment report saw fewer jobs created in September than expected by analysts (+134,000 vs +185,000), but the unemployment rate fell to 3.7% — its lowest since the 1960's. Markets, though, were more focused on the wages component of the data, which showed annual average hourly earnings growth matching expectations at 2.8%. Overall, as shown in the chart, below, with a very tight labour market and wages growth trending higher, US inflation is on the rise and that is likely to keep the Federal Reserve on track for increasing interest rates as signaled over the next couple of years. That path has been more aggressive than perceived by markets so this is, perhaps, another aspect behind this week's volatility on equity markets.
Chart of the Week
In Europe, progress appeared to be made towards the UK and the European Union agreeing to a Brexit deal, with the EU's chief negotiator, Michel Barnier, saying that a deal was within reach over the next week. The two sides moved closer to a key agreement on how to avoid a physical border between Ireland and Northern Ireland, while agreements over trade and security need to be settled before the March 29 split date. Also of note, Italy's budget situation may have taken a turn for the worse, with the government saying that it would not back away from plans to increase its deficit, placing it further at odds with the EU.
Meanwhile, China's central bank, the People's Bank of China, announced at the start of the week a cut to its required reserve ratio of 100 basis points for most of the country's banks. Effectively, the move will free-up banks to release a net amount of 750 billion yuan of liquidity into the Chinese financial system from mid-October, which is targeted at supporting economic growth as the outlook for trade deteriorates following ongoing disputes the US.
From an Australian perspective, the NAB's Business Survey showed a lift in conditions and confidence in September. Business conditions have been easing over recent months but remain above-average, with the detail pointing to the current pace of employment growth being maintained over the coming months.
Meanwhile, Westpac's measure of Australian consumer sentiment held in positive territory in October, despite households facing a range of headwinds. There were, however, indications that falling property prices are weighing on consumers, with sentiment towards the property market and expectations for prices deteriorating further in the month. This is in line with the latest Housing Finance data, which softened further in August.
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Global Scorecard: Week ending 12/10/18
