Global equity markets have started the week on the back foot, it is in this essence that I am not convinced for a number of reasons. Basically, the global stock market has a little to celebrate especially the US and European markets. Before I dig deep down in why, I am convinced there is only less than 5% chance for these equity markets to move higher.
But, let’s have a look at the year-to-date performance. The S&P 500 index is up 18.74 percent, the Dow Jones 16.40%, the Nasdaq 22.78 percent. The Eurostoxx 50 index has soared 15.95% YTD, the FTSE100 11.6%, the CAC 40 index 17.37% and the DAX 16.11%. No doubt these are very phenomenal gains, however, this is where bulls are likely to face disappointment.
The question is where is the opportunity if the stock market is going to face a muted or bearish trading trend?
Well, the CBOE volatility index is an interesting place to start with, the index is down nearly 43.16% YTD and the equivalent of this for the European Stoxx, the VStoxx index, has plunged 42.60% YTD. On Friday alone, the CBOE volatility index jumped 6.80% and I believe there is more to come.
A Lot Is Already Priced In
- The key event for this particular week is the European Central Bank meeting, and the hopes are that the bank is going to be immensely dovish in its tone. It is believed that the bank isn’t going to leave the powder dry this time, a 10 basis points interest rate cut is likely to take place. This is already priced into the market and I believe thatointed because the tone of the ECB isn’t going to be as dovish as the expectation.
the market may be disapp
- Last week, over in the US, we have seen the US banks coming out with poor quarterly earnings. In other words, there was a little to celebrate. Now, given that the US banks have not been able to help the bullish sentiment, and this is when the US economy is in a much better state than the EU: so is their balance sheets, there is a little hope for the European banks to drive the markets higher because of their earnings. My model tells me that the European banks are going to suffer more from their earning results because of the feeble trading revenue.
- The second biggest bull case for the markets, again something which is fully priced in, is the Fed cutting their interest to stimulate the growth. Now, a 25 basis points interest rate cut is the best thing that the market is going to get. If one is expecting a 50 basis points rate cut, then one must be living in a Cuckoo-Land.
- Donald Trump, the US president, isn’t the kind of specie who is going to back down anytime soon from the ongoing trade war between the US and China. A small deal is expected and this is where it stops- at least for now. Do not be surprised if he starts to put some tariffs on other countries and traders have not priced this element at all.
- In this tech heavy earning week, the results could be surprising and this may trigger a positive reaction, but it isn’t likely to last long because of the fact that the guidance for the second half estimates is going to be subdued.
To conclude, I believe that most of the positive news is already priced in and market participants haven’t given much thought to the other side of the coin. This is why I believe that the risk is skewed to the downside and this particular move maybe more violent than before.