Global markets may pause after week’s massive sell-off
DOW JONES DROPPED MORE THAN 1,000 POINTS LAST WEEK; GLOBAL MARKET TOOK $1TR HIT
F und managers said the sell-off in global markets is unlikely to continue as traders shift their focus on fundamentals, however they expect more volatility as central banks phase out quantitative easing.
The trigger for the meltdown last week was the better-thanexpected jobs report last week, which fuelled speculation of higher inflation and therefore higher rates in 2018, and therefore the US 10-year yield jumped to its highest level in 4 years to 2.85 per cent.
As a result, on Friday, the Dow Jones Industrial Average fell more than 2.5 per cent or 665 points, the largest fall since June 2016, after losing more than 1,000 through the week. The S&P 500 index fell 2.12 per cent to close at 2,762.13, its biggest daily fall since September 2016. The decline meant a loss of $1 trillion (Dh3.67 trillion) in market value.
“There were a variety of factors for the sell-off and most of the factors are not new. We have been talking about the path of the rate increase and inflation with wage growth for some time. Most investors have made money, and were waiting for some kind of a reason to take profit, so they found a reason,” Nadi Bargouti, Managing Director — Head of Asset Management at Emirates Investment Bank told Gulf News.
“We agree that rate hikes will be negative for equity markets, but I don’t think that justifies a 3.5 per cent drop in equities just due to the Fed,” Bargouti added.
Last December, the markets had been expecting three rate hikes in 2017, but analysts are widely expecting four hikes this year due to expectations of rising inflation.
“We expect markets to take a pause, and focus on fundamentals and corporate earnings. Data points to a synchronised growth, strong corporate earnings and normalisation of volatility regime that had been suppressed by central banks,” Vaqar Zuberi, Head of Hedge Funds at Mirabaud Asset Management (Switzerland) told Gulf News.
Volatility watch
According to UBS, About 80 per cent of the companies have published their results and are on track for a 13-15 per cent earnings growth and 7 per cent revenue growth. The companies have given higher guidance in 2018 after taking a lower tax rate into consideration.
But the market volatility is seen as a precursor as central banks pull back from unprecedented levels of quantitative easing by central banks.
“We would see normalisation of volatility in the market which had been suppressed since the past 9 years. This week was extreme, but investors will to have to get used to higher more normal levels of market volatility,” Zuberi said.
For example, the US Federal Reserve’s balance sheet is up 5-fold to $4 trillion since 2008, meaning about $3.2 trillion was pumped in the market, which many analysts believe has inflated asset prices, and suppressed volatility.
Fund managers are also trying to re-position themselves looking at the yields in fixed income.
“A lot of people were re-adjusting their portfolio on income earning assets, trying to gauge if they were better off with a corporate giving them a dividend, which are seen as less competitive versus fixed income instruments,” Zuberi said.
They will also see if traders will buy on dip as they did in the past decade.
“We will see buyers early next week, but they will be cautious. Markets will be in territory of indecisiveness, and traders will cautiously wait and see where the market goes,” Bargouti said. Emirates Investment Bank would want to see a 5-10 per cent further decline for them to be a buyer.
P ay raises, the US economy’s Achilles heel in its long recovery from the Great Recession, finally showed signs of accelerating last month — a trend that fanned inflation fears and sent bond yields rising and stocks sinking.
Wages grew in January from a year ago at the fastest pace in eight years, evidence that low unemployment is forcing some employers to pay more to keep or attract workers. The question is whether the gains will endure and spread throughout the economy.
US employers added a robust 200,000 jobs in January, and the unemployment rate stayed at a low 4.1 per cent for the fourth straight month, the Labour Department said Friday. But investors saw the wage growth as cause for concern. Higher pay could help swell inflation and spur the Federal Reserve to quicken its pace of interest rate increases in coming months.
The 10-year Treasury note rose to 2.83 per cent, from 2.79 per cent before the jobs report was released. And the Dow Jones Industrial Average tumbled 666 points, or 2.5 per cent, partly on the prospect of sharply higher rates and partly on poor earnings reports from Google’s parent company Alphabet, ExxonMobil and Chevron.
“Everyone has been rooting for wage growth, but be careful what you wish for,” said Josh Wright, chief economist at recruiting software company iCIMS.
Still, the jobs data point to an economy on solid footing, fuelled by strong consumer spending and global growth. After nearly eight years of steady hiring, employers are increasingly competing for a narrower pool of workers. Raises stemming from Republican tax cuts and minimum wage increases in 18 states also likely boosted pay last month.
“Labour is becoming scarce, and employers have to work to find, retain and train employees,” Diane Swonk, chief economist at Grant Thornton, said. “This is new for many employers.”
Many economists credit the Fed’s low-rate policies, including the measured pace of rate increases under Chair Janet Yellen, with stimulating enough growth to bolster hiring and wages. Yellen will be succeeded as Fed chair on Monday by Jerome Powell, a former investment banker and Fed governor.
Wage gain
In January, average hourly pay rose 9 cents to $26.74 (Dh98.21), up 2.9 per cent from a year earlier — the biggest gain since the recession ended eight years ago.
S.B. Cha, CEO of Kinestral, a company that makes high-tech windows that can be dimmed to reduce or block sunlight, said he has had to offer higher pay to attract new electrical and software engineers. Cha has ambitious plans to double his 130-person staff within two years.
But it’s difficult to find enough workers in San Francisco, where the company is based, so he transferred its cloud computing operations to Salt Lake City. Yet now even Salt Lake City is becoming competitive. As a small company, Kinestral used to pay roughly 60 per cent of what tech giants like Google paid. Now, Cha says, it has to pay closer to 80 per cent and in some cases 90 per cent.
“Every year, hiring gets tougher and tougher,” Cha said.
Unemployment among African-Americans surged back up in January to 7.7 per cent after having reached a record low of 6.8 per cent in December. President Donald Trump, in his State of the Union and other recent speeches, had boasted of the low rate for African-Americans.
Average hourly pay jumped 3.4 per cent in the past year in transportation and warehousing, which has benefited from the explosive growth of e-commerce. That’s partly been driven by the online giant Amazon, which went on a hiring rampage last year, expanding its workforce by a breathtaking 66 per cent — 225,000 jobs. That’s more than the entire manufacturing industry added last year.
Still, factories enjoyed a good year and raised pay an average 3.3 per cent. Leisure and hospitality firms, which include restaurants and hotels, increased pay 3.5 per cent.
Restaurant cooks received the largest salary increase in the past year among the 84 occupations the company tracks, according to pay data compiled by Glassdoor, a job listing website.