U.S. stocks slumped on Friday, falling the most since the U.K. voted to leave the EU, as a two-day bond market rout sent government debt yields to their highest levels since late June. German 10-year bond yields rose above zero for the first time since July. Global investors essentially expressed concerns after the European Central Bank voted to leave interest rates and bond-buying policies unchanged even in the face of weakening economic data. Investor sentiment was further challenged after Boston Fed President Eric Rosengren warned that waiting too long to raise rates “threatens to overheat the U.S. economy and risks financial stability.” The S&P 500 retreated 2.45% on Friday, while the CBOE VIX Volatility Index surged nearly 40%, its largest increase since the 49.3% surge on June 24th, the day after the Brexit vote. Needless to say, market complacency abruptly ended, with the S&P 500 ending a near-record 43-day run without a 1% move.
For the week, the S&P 500 lost -2.36%, the Dow Industrials fell by 406 points (-2.15%), and the MSCI EAFE (developed international) decreased by -0.13.
What We’re Reading
Bank Rally Falters on Renewed Growth Concerns -- Reuters
Upcoming Fed Talks Portend More Weakness -- CNBC
U.S. & Russia Agree on Cease Fire in Syria-- Bloomberg
Chart of the Week: Emerging Markets Less Vulnerable to U.S. Rate Hikes
Neil Shearing, Chief Emerging Markets Economist for Capital Economics, has stated that emerging markets may be less impacted by a Fed rate hike than a few years ago. The chart shows current account positions as a share of GDP today compared with the “Taper Tantrum” in May 2013. Two things are worthy of note, the first of which is that deficits have narrowed in most emerging markets since 2013. The drop has been particularly sharp in India and Brazil. The second, as a result, is that only a handful of emerging markets now run deficits that might be considered worryingly large. Deficits larger than 4-5% of GDP are usually a cause for concern. On this basis, Colombia, Turkey and South Africa look vulnerable to any disruption in external financing. Fed tightening could cause a problem for these EMs. But, for most, the economic implications are limited. And the prospects for the major emerging markets – the BRICs – will be shaped by developments on the domestic policy front rather than as a result of moves by the Fed.
Some materials are chosen by the Cetera Investment Management team and summarized by Jason Vitucci who is not affiliated or registered with Cetera. Cetera Investment Management provides investment management and advisory services to a number of programs sponsored by First Allied Securities and First Allied Advisory Services. Cetera Investment Management individuals who provide investment management services are not associated persons with any broker-dealer. International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification.