The sell-off in global equity markets may get worse by the days ahead as the end of the quarter nears.
The scepticism on a trade deal between the United States and China and a vote on a Brexit deal may weigh on equity indices going forward, which will coincide with potential profit-taking that funds undertake at the end of the year followed by re-positioning.
The Dow Jones Industrial Average (DJIA) closed more than 2 per cent lower on Friday to close at 24,388.95, bringing the five day fall to more than 4.5 per cent.
The S&P 500 index closed 2.33 per cent 2,633.08, after losing more than 4.6 per cent last week.
“My fear is price action could get uglier as we near year-end while compounded by worsening liquidity,” Stephen Innes, Head of Trading APAC at OANDA in Singapore said.
Plus, the arrest of Meng Wanzhou, Chief Financial Officer of Chinese tech firm Huawei may also add to the scepticism of a possible truce in the trade war.
“Investors have grown concerned that a trade truce between the US and China brokered over the weekend could prove short-lived. Such worries have been stoked by a US request for the extradition of Meng Wanzhou, suggesting that talks between the US and China are unlikely to be productive,” Mark Haefele, global chief investment officer at UBS said.
The DJIA has given up all the gains registered so far in the year, and the index traded more than a per cent lower as a potential trade war between the US and China is seen slowing global growth. The Asia Dow index closed 0.09 per cent lower at 3,177.37.
UBS continues to retain its overweight position on global equities although it expects higher volatility.
“The sell-off since early October has now left global equities at a roughly 15 per cent discount to their average trailing price earnings ratio over the past three decades. With the global economy continuing to grow and positive earnings, we retain our overweight in global equities. That said, investors need to brace for higher volatility as the cycle matures and as US-China tensions remain elevated,” Haefele said.
But headwinds are many for the equity markets.
“We expect some of this technical weakness to continue over the next weeks as the ‘Brexit uncertainty, fragility of the Italian politics and, most importantly, decelerating growth act as headwinds. After a brief relief rally, investors are coming to a realisation that the ceasefire in the China-US trade talks is only temporary and lacking detail,” Karolina Noculak, Investment Strategist, Aberdeen Standard Investments said.
Gold prices, seen a safe hedge instrument, have not been benefiting in a big way from the headwinds.
Prices have been gaining steadily. Comex gold for Feb delivery traded at $1,254 an ounce on Friday, but were still down from the high of $1,400 seen in early 2018. “The uptrend in gold that was established after hitting a low point in August and following the break above the October high may now attract additional short covering from hedge funds who have been holding a net-short position since July,” Ole Hansen, head of commodity strategy with Saxo Bank said.