We expect the current phase of erratic trading in equity markets to extend into October. The failure of the Central Bank's considerable efforts to revive investor confidence has become patent this summer. Benchmark US equity indices are currently trading less than 5% below their highest ever levels. And yet, the demand for financial security world-wide has continued to rise.
The most evident recent manifestation of the rising demand for financial security has been the acceleration of the buying of duration in US$ debt markets. There has been no evident economic or financial shock, at least from an American perspective, to justify the stampede into US$ duration. To be sure, the news flow that relates to the growth of world output and trade, notably from Asia, remains discouraging. However, there is little new to say about the recession in the global producer space, beyond the observation that the anxiety about the outlook for global growth has become chronic. To be sure, the warning message of recession from the US$ yield curve should not be dismissed. However, it is dishonest to ignore the influence of the massive distortions produced by the institutionalization of Central Bank financial repression in the developed world since the GFC.
It seems clear to us that the authentic story of this time is not recession but reflation. The alternative would appear to be financial repression for everybody, including America. At the present time the investment consensus is tempted increasingly to believe that America’s reflation will fail. The duration frenzy is an option on this failure. Still, the debate has just begun.
Beyond October we think we can expect better news about the growth of global output and trade. Before we arrive at that juncture we expect that the support levels in equity markets, notably at the 2800 threshold of the S&P500, will be revisited, at least once. Indeed, we think it probable that a return to the lowest levels of May-June in US equity will take place before a year-end recovery can be sustained, by which we mean the 2670-2700 level for the S&P500. In such circumstances we presume that the DJ EuroStoxx50 would fall to the 3100 threshold. In other words, with patience excellent investment opportunities should emerge.
Author:
Thomas Neuhold, CFA
Head of Austrian Equity Research
Kepler Cheuvreux
6 September 2019
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Note
Wiener Börse AG would explicitly like to point out that the data and calculations given in this report are historic values, which do not permit any conclusions as regards future developments or value stability. Price fluctuations and loss of capital are possible in securities trading. The contribution is the personal opinion of the analyst and does not constitute a financial analysis or a recommendation for investment by the exchange operating company, Wiener Börse AG.