Yesterday saw a brutal sell off in tech stocks which led a broad market decline, and it is starting to look like investors are beginning to wake up to the reality of what the coronavirus has done to the global economy. Like the virus itself, surviving it is one thing, recovering is another battle. The selling in some of the big tech darlings was spectacular: Tesla –9%, Apple –8%, Microsoft –6%, Zoom –10%.
The Nasdaq settled down -5% for the day but off its lows and it’s only back to where it was last week, which simply shows what an extreme melt-up it’s been. The S&P 500 closed down -3.5%.
The US presidential battle is getting nasty too. We should have expected this – it will likely get much worse. But the implications for the market need serious consideration.
“I worry there is an increasingly grave risk the election result is contested to a point where the concept of a smooth handover of power is tested – well beyond ‘hanging chads’,” observed Neil Wilson, Chief Market Analyst at Markests.com. “American democracy is in peril and this should worry us all. Neither Democrats nor Republicans have covered themselves in glory thus far and the fighting will only become more acrimonious. The election is now by far the most serious risk to markets in that it could fatally undermine faith in the American system that has underpinned the West for 80 years.”
The US economy is in serious trouble
Meanwhile the US economy remains in serious trouble. Jobless claims remain exceptionally high. Although yesterday’s initial claims was better the only stat that really mattered after the Department of Labor changed the way it measured things was this: The total number of people claiming benefits in all programs for the week ending August 15th was 29,224,546, an increase of 2,195,835 from the previous week. Today’s nonfarm payrolls – expected at +1.375m – may well surprise to the downside. The U.K. economy is hardly in better shape with the furlough scheme setting up the prospect of a wave of unemployment.
Whilst this is happening, all the central banks can do is further inflate the bubble. Yesterday’s sell off was about excessive buying in a handful of stocks, bad money in the markets chasing an ever-decreasing number of stocks, and a volatility skew that told us things were not right and heading to a rollover. Excessive call option volumes leading to market makers needing to buy the underlying stocks seemingly chased the markets higher, but retail buying has played a strong part too. It’s all been rather unseemly and a correction is required – there may be further to run lower ahead of the election as risk ramps up.
“We’d been worried by spiking Vix futures whilst the market was making all-time highs and so it proved to be a red flag,” observes Wilson at Markets.com. “The question longer term for this market is whether we should be confident earnings will recover. That remains a problem, but not intractable – a vaccine would help a lot. On the interest rate side of the equation, the Fed remains on side and will keep rates on the floor.”
Both the FTSE 100 and FTSE 250 sank on Thursday, although not to the extent of their US counterparts given the UK’s relatively short set of listed technology names. The FTSE 100 was down 1.5%, with investment trust Scottish Mortgage the biggest loser due to its mammoth stake in Tesla and other tech companies.
Miners delivered a poor day on Thursday too, with BHP Group, Evraz, Glencore and Anglo American all off by more than 4%. Investors had new data on the state of the UK services sector, which is a dominant part of the economy, to digest. IHS Markit’s UK services purchasing managers’ index came in at 58.8 for August, an increase on July’s 56.5 (a reading of more than 50 indicates expansion). According to Morningstar, service providers highlighted pent up housing market demand, spending driven by the government’s Eat Out To Help Out scheme and a recovery in business service demand.
Any rally may prove to be a selling opportunity
European equities were dragged lower by the tech-induced sell-off on Wall Street yesterday but recovered in early trade on Friday morning. With sentiment rolling over in the big US names, any rally may prove to be a selling opportunity. Shares in Spanish banks Bankia and Caixabank shot higher on plans to merge, lifting the entire Spanish banking sector. UK house builders were under pressure after the Competition and Markets Authority (CMA) announced enforcement cases against Barratt Developments, Countryside Properties, Persimmon Homes and Taylor Wimpey. The CMA said it found ‘troubling evidence of potentially unfair terms concerning ground rents in leasehold contracts and potential mis-selling’, adding that it is worried leasehold homeowners ‘may have been unfairly treated and that buyers may have been misled by developers’. Shares in the four accused dipped though TW recovered as of send time.