Daily Commentary BY THE CURVE TEAM –

Tighter Financial Conditions Become a More Critical Component in Market Psychology

26th October 2018

The equity market correction we are seeing at the moment has been going on for far longer than most people realise. The global peak in equity markets was back in December 2017/January 2018. That was a time when global euphoria peaked. The US equity market rebounded from a March 2018 low and has just recently responded to the continuing tighter financial conditions of higher US interest rates and a strong USD. A rolling bear market has finally captured the US equity market even though forecast growth and earnings are still achievable and sound.

The main issue for the market continues to be liquidity. The reason for the global bear market in equities is global liquidity is drying up. Back in 4Q2017 the FED announced their balance sheet reduction strategies and Janet Yellen retired. This is when markets reassessed the level and influence of interest rate costs on debt servicing and diminishing credit growth and money supply dynamics through broad money growth.

The reality is the FED is tightening and the ECB is tapering. At the same time the FED is issuing far greater supply of Bonds at their regular auctions. That is what has essentially tipped the market over the edge in early October when the US 10 yr rate shot up from 3.05% to 3.25% in a few sessions.

The FED will raise rates again in December but this is the meeting where we will really need to assess their thoughts on the likelihood of whether we are going to get 2 or 3 further rate hikes in 2019 or if the FED will end their rate normalisation strategy sooner than most people think. I expect the rout in global equities to find a bottom over the next 4 – 8 weeks and commence a rebound that may last into 2Q2019.

Peter Sheahan

Director - Institutional Markets