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Getting To The End Of A Sugar High...

29.Oct. 2018 US stocks (sector performance) bowed under the twin negative influence of weaker than expected Fang reports on Thursday night and a GDP report which raised some concerns despite a favorable headline number. The S&P500 shed -1.7% and the Nasdaq -2.3%. Fang earnings were actually not that bad, just the guidance and the growth rate were underwhelming. The fact that Fangs (Amazon in particular) shed 8% in one session was perhaps an additional sign that the equity market has become exhausted. There is not much questioning about the US equity market outperformance owing much to the stellar performance of the Fang sector. European shares dropped as well but outperformed ( EUROSTOXX DAX CAC SMI ). We often referred to US equity markets going up while others were going down as the Alligator’s jaws. Could it be that the Alligator is closing its jaws heading for deeper water? The second negative catalyst for the day came with the Q3 US GDP report of which the favorable headline growth number of +3.5% (from +3.3% expected) had much to do with the biggest buildup in inventories since 2015, which contributed 2.07%, or 59% of the bottom line number. All other GDP components were ugly, with nonresidential fixed investment, or spending on equipment, structures and intellectual property dropping to 0.8% in 3Q after rising 8.7% in Q2. This report was consistent with the US economy returning back to the `same old' model of consumers accounting for most of the growth which will have supply siders disappointed. Core PCE was also consistent with an economy peaking, coming at +1.6% (from 2.1%). This suggested that the US economy might be getting past the Sugar High. Government bonds rallied on weaker stocks and risk aversion as well but still moderately, all things considered with US 10y Treasury yield dropping 4bps to 3.08% (bond yields snapshot) and 10y German Bund yields posting similar gains. The BTP/Bund spread was unchanged. Late on Friday, Italy avoided a second rating downgrade in a week as S&P Global Ratings decided only to lower its outlook on the nation’s creditworthiness, possibly opening the stage for a further contraction in the spread, baring more adverse developments elsewhere. US High Yields underperformed (HYG). Former Fed Chair J. Yellen deplored in an FT article that public policy did not learn the lessons of 2008 with a rather frontal assault on D. Trump’s deregulation policy which she warned is leading to plunging loan standards. 

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