Bad Debts in US Regional Bank Cause Volatility

One of Warren Buffet’s famous quotes is ‘it’s only when the tide goes out that you can see who’s been swimming naked.’ The significance of this quote is clear based on events this past week. Potential fraud related credit losses from at least four US regional banks caused huge stock market volatility.

When these credit issues occur as a result of poor lending/and or fraud it is generally a sign of an ageing bull market and the need for Banks to utilise the Federal Reserve (Fed) as a lender of last resort.

It is estimated that the Fed made a little over $15Bn especially available on Wednesday/Thursday last week. Fortunately, this indication of financial stress or tightening financial conditions did not continue on Friday, which soothed market nerves. The US volatility index (a fear gauge or the implied volatility of the market) saw a rise by over a half only to fall back to levels more consistent with the last few weeks.

As we reach the final week of October, markets are still unable to properly resolve the conflict of healthy investor risk appetite, with a government shutdown, high volatility, growing political and economic tensions plus high valuations driven by Artificial Intelligence enthusiasm.

Although it is early, the start of the third quarter reporting season has not disappointed. Companies appear to have adapted well to the new global trading environment despite awful predictions just six months ago when President Trump delivered his own ‘Liberation Day.’ Forecasts suggest a 9% rise in earnings despite political dysfunction and trade frictions.

Turning to the key relationship between China and the United States, we have again seen President Trump row back from hard rhetoric to more conciliatory tones. This has been instrumental in reasserting risk appetite at a time when the US government remains closed and investors flying blind with little up to date economic data.

Regionally, Europe displayed a striking performance difference between the equity markets of France and Germany. The former was up a touch over 3% whilst Germany was down 2%. Encouraging results from Louis Vuitton (LVMH) boosted the French index and the cyclical sector. Other Paris based stocks such as Hermes and L’Oreal joined the fun whilst Germany fell behind because of little exposure to similar luxury stocks.

Corporate results are abundant this week. Netflix will be notably high on investor lists. Q3 estimates are robust based on strong subscriptions and positive advertising trends. A figure of 5.6M new subscribers is expected although ‘whisper’ numbers point to a higher number helped by encouraging engagement metrics and a weakening US dollar.

Domestic UK investors will be watching carefully for the September inflation print released early morning on Wednesday 22nd. This could give a clue about whether there is any chance of another UK interest rate cut ahead of Christmas.

The US inflation equivalent is due on Friday which will provide valuable information on whether the trade tariffs are now beginning to bite more aggressively on consumer spending. On the same day Purchasing Manager Indices are due and could validate growing investor conviction of a stable and growing US economy.

China reviews their five-year economic plan which could hold important messages for the US President and trying to grapple with current trade tensions.

History is to be made this week as Japan appoint their first female Prime Minister. The local market favours her pro-growth credentials, but the fragility of her coalition government will make her pursuit of executing her policies much harder.

Finally, look out for an end to the US government shutdown as a form of compromise on their budget is forecast to be cemented this week.

(Cover Image Source: Steve Pancrate)