Market worries persist, but is the worst of the sell off behind us?

Stocks are a sea of red on Tuesday morning, as the sell off deepens. European indices are experiencing hefty losses so far, the Eurostoxx index is lower by more than 1% and the FTSE 100 by more than 0.8%, as cyclical sectors like consumer discretionary, industrials and financials also take a hit.

Safe havens falter as sentiment declines

There are multiple drivers of markets right now, including fears about AI tech stock valuations, concerns about a weakening US economic outlook, and concerns that the Fed won’t cut interest rates fast enough. Even traditional safe havens are faltering this morning; gold is lower by $23 per ounce and is just about clinging on to the $4,000 level. Luxury stocks, which used to be considered ‘recession proof’, are leading European indices lower. Hermes and LVMH are some of the worst performers on the Eurostoxx so far on Tuesday and are falling alongside tech stocks such as Dutch giant ASML. In FX, the yen and the Swiss Franc are performing like their safe haven status would suggest, and they are leading the G10 FX pack so far this morning.

Bitcoin finds some support at $90,000

This stock market sell off is not only limited to AI stocks, companies also linked to bitcoin are under pressure, after the crypto currency fell to its lowest level since April. At one point this morning it dipped below $90,000, although it has clawed back some losses as we have progressed through the morning, which could be an early sign that markets may stabilize later today.

US stocks that lost more than 5% on Monday included a broad mix of airlines, financial firms and tech stocks, which suggests that the sell-off has broadened beyond tech. This is one of the reasons that pushed the S&P 500 below its 50-day moving average, which is a sign that short term momentum is to the downside.

A broad base selloff suggests that tech will still dominate

A broad sell off is helping the S&P 500 market-cap weighted index outperform the S&P 500 equal weighted index, which adjusts for mega cap tech stocks. The stock market correction is about more than just big tech and AI, with the hyperscalers performing better on a relative basis than some other parts of the market. For example, Expedia was one of the weakest performing stocks on the S&P 500 on Monday, while Alphabet was the top performer, after Warren Buffet announced that he had increased his stake in the tech giant.

Thus, the selloff is now not merely a correction in highly valued tech, Expedia has a 12-month forward price to earnings ratio of less than 14. Instead, this is a broader sell-off reflecting deep concerns about the US and the global economy.

Chart 1: The sell off is not just about highly valued tech: the S&P 500 continues to outperform the equal-weighted index, which adjusts for mega cap tech stocks.

Source: XTB and Bloomberg

US issues cause global sell off

Monday’s price action is also worth watching closely. Global stock markets were fairly stable until the US markets opened. This suggests that domestic sentiment is worsening in the US, which has spooked global markets. It also suggests that US-specific problems are building. This month there has been some significant tightening and liquidity issues with the USD repo markets. These markets provide key dollar funding for banks, hedge funds and money market funds. Rising rep rates is a concern, since it could make some investment strategies for financial institutions less profitable, which may trigger forced selling, particularly in the Treasury market.

In recent weeks, Treasury yields have risen, however, they fell sharply on Monday, suggesting that US Treasuries remain a haven, and there is no sign of forced selling at this stage. However, it is worth watching repo rates in the current environment. If the deluge of US economic data that is released later this week suggests more policy uncertainty from the Fed, then we could see a big reaction in the funding and Treasury markets.

The origins of the stress in the funding markets include quantitative tightening from the Fed, massive Treasury issuance and concerns about the path for interest rates. The Fed ended QT at their last meeting, but the recent market sell-off suggests that there are lingering concerns for investors.  

Concerns about the US are at the epicentre of this sell-off. So, if sentiment is to calm down, it may need to come from the US first. There are some initial signs of stabilization in the US futures market. Futures are predicting small losses for US indices, and Bitcoin is also stabilizing back above $90,000. If sentiment does improve this afternoon, we could see a late recovery in Europe.

Can Walmart save the markets?

Sentiment remains fragile; however, some key event risks this week could soothe fears including benign US labour market data on Thursday that opens the door to another Fed rate cut. Walmart is also releasing earnings on 20^th November, and they are expected to report results that are at the top end of forecasts, including a huge $177.57bn in revenues for last quarter. If Walmart can post strong results, this could calm fears about the strength of the US consumer as we lead up to Thanksgiving and Black Friday next week.