Global risk assets sold off due to the increasing recessionary fears

Commenting on today’s trading with a focus on recessionary fears, Gorilla Trades strategist Ken Berman said:

recessionary fears

Alexas_Fotos / Pixabay

While the last couple of days confirmed the recent ‘under-the-hood’ weakness, small-caps finally performed better than the large-cap benchmarks is a positive sign, despite today’s scary price action. Today’s volatile dip below key technical levels could already mark a short-term bottom in stocks, with especially the spike above 20 in the Volatility Index (VIX) signaling panicky sentiment on the Street.

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Q2 hedge fund letters, conference, scoops etc

The major indices got hit hard for the second day in a row, and global risk assets sold off as well due to the increasing recessionary fears and the threat of a tariff skirmish between the European Union (EU) and the U.S. The Dow was down 494, or 1.9%, to 26,079, the Nasdaq lost 123, or 1.6%, to 7,785, while the S&P 500 fell by 52, or 1.8%, to 2,888. Decliners outnumbered advancing issues by a 4-to-1 ratio on the NYSE, where volume was well above average.

Even though recessionary fears were primarily behind today’s bloodbath, the possible escalation of the tariff also weighed on investor sentiment. Due to the EU’s disputed subsidy to Airbus, the U.S. now is allowed to slap tariffs on goods worth $7.5 billion annually, according to the decision of the World Trade Organization (WTO), and the EU seems ready to retaliate. The defensive utilities sector was once again the strongest, while materials were the worst-performing sector due to the weakness in energy-related issues, but consumer goods, industrials, financials all suffered amid the broad sell-off.

Oil

The price of oil continued to decline not just because of the broad sell-off in risk assets but also due to the surprisingly large U.S. inventory build, and the commodity hit its lowest level since the early-August correction. The WTI crude oil contract it’s approaching the key $50 per barrel level, despite hitting $64 in the wake of the Saudi attack, as this week, the Kingdom reportedly restored its output to its pre-attack level. The threat of the new trade tariffs also weighed on energy-related shares, as a decline in global trade would hurt the sector proportionally more.

Recessionary fears ahead of rate cut

The odds of another rate cut by the Fed this month have increased significantly over the past couple of days, as Treasury yields plunged lower across the curve. Rates are now very close to their multi-year and all-time highs hit in August, and traders put the chance of a 0.25% cut to almost 80%, despite the Fed’s ‘too hawkish’ monetary statement. The Central Bank will only hold its next monetary meeting towards the end of the month, but Chairman Jerome Powell will give a speech, following after the release of the government jobs report, so he might reflect on this week’s bearish developments.

Weak numbers portend recessionary fears

We are in for a huge day of economic releases both internationally and domestically, and in light of the ISM manufacturing PMI’s impact, the non-manufacturing PMI will clearly be in focus. Analysts expect a healthy 55.1 reading, down from last month’s 56.4 figure, which would be among the strongest in a global comparison, confirming the resilience of the U.S. economy. The British services PMI and the Eurozone retail sales report could set the stage for the U.S. session, and bulls are hoping for, at least, an early bounce following today’s plunge. Stay tuned!



About the Author

Jacob Wolinsky
Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Prior to ValueWalk, Jacob was VP of Business Development at SumZero. Prior to SumZero, Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver