October is shaping up to be an interesting month for financial markets. Some instruments demonstrate increased volatility, above their monthly average for the last year, which opens up decent profit-making opportunities. The US stock market faced quite a challenging week, especially last Wednesday - when the key benchmarks (Dow Jones, S&P500, NASDAQ) fell under the pressure of a massive selloff, which cost them nearly 10% of their total capitalization. The chart below is very indicative.
Dow Jones Industrial Average (USA30) plummeted more than 800 points, S&P500 (USA500) registered its worst result since February. Both indexes turned out the biggest underdogs, not least because of the 4,8% technology sector drop, the biggest since August 2011. The White House immediately pointed fingers on Federal Reserve saying that it has gone crazy being too stringent with its monetary policy. Market participants explain such steep decline with a surge in the US Treasury yields, which remain at their highest since 2011. Taking into account the fact, that Treasury yields indicate market expectations of further policy tightening by the Fed, their effect on the US share markets is obvious.
Another reason for the US stock market sell-off is a slowing global economic recovery on the back of a trade war between the US and China. In his last statement, the US President Donald Trump threatened to place tariffs on another $267 billion worth of imports if China reacts to the recently imposed tariffs and takes retaliatory action. Escalating trade tensions caused the International Monetary Fund to lower its international growth forecast from 3,9% to 3.7% for 2018-2019, for the first time since 2016. Developing economies such as Turkey, Brazil, Iran, and Argentina will be hit the hardest according to the IMF, as these countries are on the verge of a large-scale liquidity crisis.
Traders have now turned their eyes on the US quarterly reports. Right after the companies reported their quarterly revenue figures, Morgan Stanley (NYSE:MS) shares rose 2.5%, and Goldman Sachs (NYSE:GS) gained 0,9%. These results spurred growth in the financial sector, pulling the indexes from the bottom.
Despite this recovery, the main drivers for the sell-off are still there - the yield of the US Treasury notes is at the highest levels, which means that investors’ interest in the stock market will remain suppressed. When the safest assets give such a yield, it’s simply unreasonable to invest in higher-risk assets. After the release of the US Fed’s minutes, market participants will most likely get another confirmation of Fed’s intention to hike its rates in December. Amid this news, the 10-year treasury yields have all chances to climb above 3.4%, putting even greater pressure in the national stock market. In other words, the downtrend in the US share markets is only beginning. We recommend seizing the opportunity and short selling with the target at 2400 points.
