Today's Challenge: Markets vs. Economics

Today's Challenge: Markets vs. Economics

Last week's markets left investors looking to economics for clues; Italy faced up to the EU; China's trade surplus ballooned

"There has very definitively been a change of gear over the past 10 days"
UK Chancellor of the Exchequer Philip Hammond, on the negotiations over Brexit

Today’s challenge: Markets vs. economics This past week was difficult for bulls, with most headline asset classes turning in negative returns – even after Friday’s action.

The S&P 500 closed below its psychologically-important 200-day moving average on Thursday the 11th and traded just below it for much of Friday.  At its intra-day low on October 11th, the overall drop from the market’s 2018 high on September 21 came to (7.83%), not quite qualifying as a full-blown correction – but the NASDAQ Composite made the grade, falling (10.6%) from its high on August 30 to its intra-day low on October 11.

U.S. broad-based fixed-income indexes also retreated slightly for the week, and the Treasury yield curve flattened as safe-haven demand weighed on yields from 10-years and longer. The yield on the 10-year Treasury spent much of Friday in the range of 3.14% - 3.18%, down notably from its 2018 high of 3.259% on October 9.

Unusually for this steep of a pullback, no single piece of economic or market news seemed to drive the rout. To be sure, there was plenty of negative sentiment to go around – from saber-rattling on tariffs to potential shortages of crude oil; nervousness about the current earnings season; the International Monetary Fund (IMF) reducing its forecast for global growth; and Federal Reserve officials speechifying about the possibility of hiking rates to slightly above “neutral” in future meetings of the FOMC.

But by week’s end, the markets’ moves were described by many observers as a “technical” pullback as much as anything else, with some valuation-sensitive active fundamental investors using the pullback to buy favored assets at favorable prices.

Italy: Agreement to disagree The official version of Italy’s budget was ratified by Italy’s coalition government, with its draft 2.4% deficit still in place, defying the European Union’s warnings about exceeding its guidelines – but increasing political goodwill for the Eurosceptic parties in Italy’s ruling coalition. This sets the stage for continued confrontation, which is unlikely to calm Italy’s equity or bond markets, where 10-year spreads to benchmark German rates remain near 2018 highs, at about 3.08%.

U.S. – China trade: Volume matters September’s trade with China set new records, with a $34.1 billion surplus for China, bringing the year-to-date figure to $225.8 billion, according to official figures from China.  The year-ago figure for the same period was $196 billion. The increase came from a 14.5% increase in exports to the U.S., as well as a decline in the goods that China bought from the U.S. Ironically, the increase in the surplus comes in part from a booming U.S. economy, which is increasing the demand for goods from China.  It’s yet unclear how much of the increase in exports from China is due to inventory boosts in advance of the imposition of the next round of tariffs from both countries.

In related news, the IMF announced, via an interview with Markus Rodlauer, Deputy Director of the IMF’s Asia and Pacific Department that the renminbi (yuan) is “not out of line,,, [and] broadly in line with the fundamentals”, and went on to say that the People’s Bank of China (PBoC), the country’s central bank, was allowing the exchange rate to respond to “market pressures”. This assessment could have a positive influence on the upcoming semi-annual assessment of the state of the world’s currencies by the U.S. Treasury Department.


All data Source: Bloomberg, as of Oct 12, 2018, 2:20 PM ET.


The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S.

The NASDAQ Composite Index is a market-capitalization-weighted index that is designed to represent the performance of NASDAQ securities and includes over 3,000 stocks.



IMPORTANT INFORMATION: All investments involve risk, including loss of principal. Past performance is no guarantee of future results. An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not  take into account the particular investment objectives, financial situation or needs of individual investors.

All Investors in EU and EEA countries ex UK and Switzerland:

Prior to 29 March 2019, this financial promotion is issued by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London, EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorised and regulated by the UK Financial Conduct Authority. Subject to regulatory approval as of 29 March 2019, this financial promotion is issued by Legg Mason Investments (Ireland) Limited, registered office Floor 6,, Number One, Ballsbridge, 126 Pembroke Road, Dublin 4. DO4 EP27.  Registered in Ireland, Company No. 271887. Authorised and regulated by the Central Bank of Ireland.

All Investors in Switzerland:

Issued and approved by Legg Mason Investments (Switzerland) GmbH, authorised by the Swiss Financial Market Supervisory Authority FINMA.  Investors in Switzerland: The representative in Switzerland is FIRST INDEPENDENT FUND SERVICES LTD., Klausstrasse 33, 8008 Zurich, Switzerland and the paying agent in Switzerland is NPB Neue Privat Bank AG, Limmatquai 1, 8024 Zurich, Switzerland. Copies of the Articles of Association, the Prospectus, the Key Investor Information documents and the annual and semi-annual reports of the Company may be obtained free of charge from the representative in Switzerland.

All investors in the UK:

Issued and approved by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the Financial Conduct Authority. Client Services +44 (0)207 070 7444


The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, or a guarantee of future results, or investment advice.

Active management does not ensure gains or protect against market declines.

U.S. Treasuries are direct debt obligations issued and backed by the "full faith and credit" of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasury securities, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.

Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.