Tech stocks lead market falls, Morgan Stanley sees biggest correction since February

Markets fell on Monday.

The S&P 500 fell 0.6 percent, the STOXX Europe 600 fell 0.3 percent and the Nikkei 225 fell 0.7 percent.

Technology stocks were among the biggest losers. The Nasdaq Composite tumbled 1.4 percent and the STOXX Europe 600 Technology Index plunged 1.6 percent.

Facebook fell by 2.2 percent. It has lost more than 20 percent from a recent peak hit on July 25, leaving it officially in bear-market territory.

Michael Mullaney, director of global market research at Boston Partners, said that “underlying fundamentals remain extremely strong in the U.S., which should continue to support us”.

In contrast, analysts at Morgan Stanley said that “the selling has just begun and this correction will be biggest since the one we experienced in February”.

Amid strong inflows into US stocks, BAML sees possible sell signs

Markets rose last week. The S&P 500 rose 0.6 percent, its fourth consecutive weekly gain, while the STOXX Europe 600 rose 1.7 percent, its strongest weekly gain in more than four months.

Data from Bank of America Merrill Lynch showed that flows into US stock funds and ETFs last week were the strongest in six weeks.

Strong consumer and government spending helped the US economy grow at a 4.1 percent rate in the second quarter, the fastest pace in almost four years, according to a report on Friday.

“We remain fairly constructive about equities,” said Chad Oviatt, director of investment management for Huntington Private Bank. He added that “there’s a lot of confidence about earnings growth” but also suggested that the GDP number “will signal that the Fed can continue with its plan for rate increases”.

Tom Pearce, European equity strategist at UBS, wrote in a note on Friday that European per-share earnings growth “has accelerated”. However, he noted that the “breadth of surprises has been weak”.

Indeed, despite the strong inflows into US stocks, BAML analysts suggested that investors aggressively sell any equity rally if the S&P 500 does not put in new highs by the end of this quarter and if China’s stock market does not rebound.

Markets mixed as Facebook plunges

Markets were mixed on Thursday.

The S&P 500 fell 0.3 percent and the Nikkei 225 slipped 0.1 percent but the STOXX Europe 600 rose 0.9 percent.

Facebook led the falls in the US, plunging 19 percent after reporting lower-than-expected quarterly revenue and slowing user growth and providing weak guidance. The Nasdaq Composite fell 1.0 percent.

In Europe, the European Central Bank left interest rates unchanged.

“I’m not surprised to see a decline like this in Facebook, especially since even with this drop its still up year-over-year,” said Brian Milligan, portfolio manager of the Ave Maria Growth Fund. “Beyond the FAANGs, things look pretty good right now, not withstanding the trade rhetoric, which seems to change every hour.”

JP Morgan Private Bank's head of thematic equity solutions Stephen Parker thinks a new high is possible for the S&P 500.

“I do think we break out to new records,” Parker told CNBC on Wednesday. “To us, it’s all about earnings.”

US stocks rally after US-EU talks but Facebook takes a hit

Markets were mixed on Wednesday.

The S&P 500 rose 0.9 percent and the Nikkei 225 rose 0.4 percent but the STOXX Europe 600 fell 0.3 percent.

US stocks rallied towards the close after US President Donald Trump made an announcement after a meeting with EU President Jean-Claude Juncker in Washington that the US and the EU will maintain a “close relationship” with “strong trade relations”.

The Nasdaq Composite jumped 1.2 percent to end at a record high but during the extended session, Facebook lost about one-fifth of its value after its earnings report missed expectations on revenue and the company said it expected revenue-growth slowdown to continue.

This could be troubling for the stock market as a whole. As Gluskin Sheff chief economist and strategist David Rosenberg said in a note, “a mere six stocks — Alphabet, Apple, Amazon, Netflix, Microsoft and Facebook” has kept the overall market rallying. The rest of the market “has done practically nothing year-to-date”.

Rosenberg added that such concentration was last seen in the late 1990s. “We know from history how these cycles typically end.”

Alphabet soars, Shanghai jumps, but “dramatic widening in credit spreads” ahead

Markets rose on Tuesday.

The S&P 500 rose 0.5 percent, the STOXX Europe 600 rose 0.9 percent and the Nikkei 225 rose 0.5 percent.

Leading gainers among S&P 500 stocks was Alphabet, which soared 3.9 percent after reporting strong results. Facebook and Amazon rose 1.8 percent and 1.5 percent respectively.

Despite those gains, the Nasdaq Composite slipped 0.01 percent.

“It leads me to believe that underneath it all, investors are worried about the tariff situation and what the implications are going to be for corporate profits in the third quarter,” said Jim Awad, senior managing director at Hartland & Co.

Among the top-performing markets on Tuesday was China, where the Shanghai Composite jumped 1.6 percent after China's State Council said on Monday that it would engage in more “vigorous” fiscal policy.

Meanwhile, Jim Paulsen, chief investment strategist at The Leuthold Group, told CNBC on Tuesday that international markets should be “maximally overweighted” relative to US stocks.

Paulsen noted that the real earnings yield of US stocks is low, which is where bull markets usually end.

David Rosenberg, Gluskin Sheff chief economist and strategist, appears more concerned about the credit market.

“The corporate bond market is today’s bubble,” he told CNBC on Monday. “Something tells me in the next six months that we’re going to have a dramatic widening in credit spreads.”

Markets mixed, trade war concerns linger

Markets were mixed on Monday.

While the S&P 500 rose 0.2 percent, the STOXX Europe 600 fell 0.2 percent and the Nikkei 225 tumbled 1.3 percent.

A meeting of G-20 finance ministers and central bankers ended on Sunday without resolving trade tensions between the US and other countries.

Instead, the officials warned in a communique that economies were threatened by risks that include “rising financial vulnerabilities, heightened trade and geopolitical tensions, global imbalances, inequality and structurally weak growth, particularly in some advanced economies”.

US investors have largely ignored the threat of a trade war though, as the US stock market again showed on Monday. The S&P 500 remains near its all-time high despite the majority of fund managers saying that they are concerned about it.

Goldman Sach thinks this complacency may be misplaced.

According to Goldman, a trade war would have minimal impact on earnings from reduced revenue but a large impact from reduced margins.

“Conservatively assuming no substitution to other suppliers or pass-through of costs, and no boost to domestic revenues or change in economic activity, a 10% tariff on all imports from China would lower our 2019 S&P 500 [earnings per share] estimate by 3%,” Goldman wrote. “If tensions spread and a 10% tariff were implemented on all U.S. imports (highest rate since 1940s) our EPS estimate would fall by 15%.”

US stock bull market continue but small caps may be weak link

Stocks rose slightly last week. The S&P 500 gained less than 0.1 percent while the STOXX Europe 600 rose 0.2 percent.

Andrew Cinko of Bloomberg said that the US bull market appears healthy and that “buy-the-dip is alive and well as a trading strategy”.

“That resulted in the Nasdaq Composite and S&P Tech indexes setting record highs, while the S&P Smallcap 600 Index ventured into all-time high territory, too,” said Cinko. “When both small and large cap parts of the stock market are stepping higher, it’s a sign the breadth of the advance is broad, and therefore healthy.”

However, one fund manager thinks that small cap stocks may not be able to keep up for long.

Larry Glazer, fund manager at Mayflower Advisors, said that small cap stocks have benefitted from trade war concerns but they may now be at an “absurd and ridiculous premium”.

“Investors are fearful, and they’ve been positioning for the smallest stocks they can get their hands on, and the most domestic stocks they can get their hands on in hopes of escaping this trade war,” said Glazer on CNBC last week.

However, Glazer thinks that US President Donald Trump is “going to make a deal” to end the trade war. “The only people who want a trade war less than the American voters are the American politicians going into mid-term elections,” he said.

Markets fall as Trump hits out at Fed, EU and China

Markets were mostly lower on Friday.

The S&P 500 dipped 0.1 percent, the STOXX Europe 600 fell 0.2 percent and the Nikkei 225 fell 0.3 percent.

Mike Dowdall, an investment strategist and portfolio manager at BMO Global Asset Management, said that “market fundamentals look pretty good” but good earnings may already be built into prices “so it’s hard to see significant upside”.

Investors were also unnerved by the latest comments by US President Donald Trump, who criticised the Federal Reserve's rate hike plans, threatened “tremendous retribution” against the European Union and indicated his willingness to impose tariffs on every Chinese good imported to the US.

Markets fall but valuations “very attractive, economy doing well”

Markets fell on Thursday.

The S&P 500 fell 0.4 percent, the STOXX Europe 600 fell 0.2 percent and the Nikkei 225 fell 0.1 percent.

Treasury yields fell after President Donald Trump said he disagreed with Fed policy on interest rates and objected to a strong dollar.

“Equity benchmarks are reacting to some disappointing earnings releases today, but we should note that overall moves are modest,” said Matthew Forester, chief investment officer at BNY Mellon’s Lockwood Advisors.

Meanwhile, Wayne Kaufman, chief market analyst at Phoenix Financial Services, said that valuations are “very attractive, and the economy is doing well”, noting that US initial jobless claims fell by 8,000 last week, falling to their lowest since late 1969.

Markets rise, look set to hit new highs

Markets were mostly higher on Wednesday.

The S&P 500 rose 0.2 percent, the STOXX Europe 600 rose 0.5 percent and the Nikkei 225 rose 0.4 percent.

Stocks rose despite a report showing that US housing starts fell 12.3 percent in June and the Federal Reserve's Beige Books showing shortages of skilled workers and rising costs of raw materials.

“Earnings reports so far have been solid and despite today’s disappointing housing starts, economic data have also been trending higher, providing support for markets,” said Quincy Krosby, chief market strategist, at Prudential Financial.

Indeed, strategists are looking for stocks to set new records.

Samuel Stovall, chief investment strategist at CFRA, said that stocks could hit new highs “by the end of the month, if not the end of the week”.

Markets rise even as global growth expectations fall on trade war fears

Markets rose on Tuesday.

The S&P 500 rose 0.4 percent, the STOXX Europe 600 rose 0.2 percent and the Nikkei 225 rose 0.4 percent.

In testimony to the Senate Banking Committee on Tuesday, Federal Reserve Chairman Jerome Powell said: “With a strong job market, inflation close to our objective, and the risks to the outlook roughly balanced, the FOMC believes that – for now – the best way forward is to keep gradually raising the federal funds rate.”

However, fund managers have become less optimistic.

According to the July BofA Merrill Lynch survey of fund managers, the percentage of those who expect the global economy to be stronger a year from now is at its lowest since February 2016. It fell to a net of negative 11 percent, down from positive 40 percent at the start of 2018.

“Investor sentiment is bearish this month, with survey respondents eyeing the risks from a possible trade war,” said Michael Hartnett, BofA’s chief investment strategist.

Markets fall, risks to global growth “mounting”

Markets fell on Monday.

The S&P 500 fell 0.1 percent, the STOXX Europe 600 fell 0.3 percent and the Shanghai Composite fell 0.6 percent.

With the US earnings season just started, Mark Luschini, chief investment strategist at Janney Montgomery Scott, noted that bank results so far “look pretty good” while retail sales numbers “appear decent”.

“Market should continue to focus on these positive fundamentals unless there’s any further eruption in trade news, which will usurp the fundamental news,” he said.

In contrast, Morgan Stanley thinks that even a strong earnings season will not break stocks out of their range.

In a report on Monday, Morgan Stanley analysts led by chief US equity strategist Michael Wilson wrote that while earnings should come in ahead of analyst forecasts, “we do not see it as a positive catalyst for the U.S. equity market” as future economic growth “is likely to fall significantly”.

Indeed, in its latest World Economic Outlook released on Monday, the International Monetary Fund said that global growth “is becoming less even, and risks to the outlook are mounting”.

Markets gain as investors become more bullish

Markets had another positive performance last week, with the S&P 500 up 1.5 percent and the STOXX Europe 600 gaining 0.7 percent.

Stocks rose as investors became more optimistic.

A quarterly survey conducted by E*Trade last week showed that 57 percent of active managers described themselves as bullish on the market, rebounding from the previous quarter's 52 percent.

The latest AAII Investor Sentiment weekly survey showed that 43.1 percent of investors were bullish, a jump of 15.2 percentage points from the previous week. Bearish views fell by 10.1 percentage points to 29.2 percent.

“Trade has acted like a wet blanket on the stock market, but the fundamentals remain strong. If we can get through this issue, the earnings growth story is positive enough to lift markets,” said Anthony Saglimbene, global market strategist at Ameriprise Financial.

However, Quint Tatro, managing director at Joule Financial, noted that bank stocks have underperformed this year despite a strong economic recovery. “The financials are giving us a warning sign that something’s coming that’s not being reflected in the other sectors,” he said.

As a result, Tatro has sold the big banks and is “very cautious on the rest of the market”.

Jason Goldberg, senior equity analyst at Barclays, is more optimistic. He expects improving loan growth and accelerating share buybacks to be supportive for bank stocks.

Markets rise, yield curve not signalling bear market yet

Markets rebounded on Thursday after falling on Wednesday.

In the US, the S&P 500 rose 0.9 percent while the Nasdaq Composite rose 1.4 percent to hit a new record.

Elsewhere, the STOXX Europe 600 rose 0.8 percent while the Shanghai Composite surged 2.1 percent.

“While equity markets in the U.S. and Europe followed Asian markets lower yesterday in response to Trump’s proposals for additional tariffs, investors appear today to have adopted a much more positive stance about the prospects for an eventual resolution of the conflict,” said analysts at Daiwa Capital Markets in a note.

“We’re seeing technology pick up, and other areas more broadly as well, as fundamentals remain very good,” said Ralph Bassett, head of small and mid-cap equities at Aberdeen Standard Investments.

Meanwhile, strategists at Morgan Stanley on Thursday predicted that the yield curve will invert by the middle of 2019.

While a inverted yield curve is supposed to signal a recession, Larry Light at Forbes said that stocks could still keep climbing after that happens.

“An inverted yield curve is not a sell signal,” he quoted Ryan Detrick, senior market strategist at LPL Financial, as saying. “Recessions aren’t automatically around the corner.”

In any case, Ed Yardeni, president of Yardeni Research, thinks that the yield curve is not a good indicator of a recession and bear market this time.

Yardeni cited work by Federal Reserve economists that suggested that a near-term forward spread may be a better indicator of an imminent recession.

“Unlike far-term yield spreads, the near-term forward spread has not been trending down in recent years, and survey-based measures of longer-term expectations for short term interest rates show no sign of an expected inversion,” the Fed economists wrote.

Markets rise but trade war could “get out of hand”

Markets rose on Tuesday.

The S&P 500 rose 0.4 percent, the STOXX Europe 600 rose 0.4 percent and the Nikkei 225 rose 0.7 percent.

“In the absence of bad news, we drift higher because that is what our bias has been,” said Kim Forrest, senior portfolio manager at Fort Pitt Capital.

“With the prospect of a positive earnings season ahead of us, investors seem to have forgotten the threat of further trade tensions,” said Konstantinos Anthis, head of research at ADS Securities.

Kate Warne, investment strategist at Edward Jones, suggested that trade worries will be on the back burner “until a bit later in the year”.

In the meantime, Warne said that “global growth might still be alive” and that the trade tariffs announced so far are unlikely to have a significant impact, although she acknowledged that a cycle of tariffs and retaliatory tariffs is a concern.

But a cycle of tariffs and retaliation may already have started.

Just days after the US and China imposed tit-for-tat tariffs on each other's goods, the US on Tuesday released a list of 10 percent tariffs on $200 billion in Chinese goods.

David Stockman, the budget director during the Ronald Reagan administration, told CNBC that the US is heading for a “massive trade war” that will “get out of hand”.

Markets rise but rally could be “last hurrah”

Markets rose on Monday.

The S&P 500 rose 0.9 percent, the STOXX Europe 600 rose 0.6 percent and the Nikkei 225 jumped 1.2 percent.

The gains in stocks notwithstanding, Scott Minerd, chief investment officer for Guggenheim Partners, tweeted that markets should not ignore the risks of a trade war and that the current rally may be “the last hurrah”.

Minerd has also said that yield curve flattening is sending a strong signal of a looming recession.

Similarly, Howard Gold at MarketWatch warned that the rise in the unemployment rate to 4 percent in June from 3.8 percent in May could be a sign that it has bottomed and that the economic cycle is turning.

Gold pointed out that the low unemployment rate of each business and market cycle over the past 70 years preceded a recession by 9.2 months and a bear market by 14.8 months on average.

He concluded that “nine years into a bull market and economic recovery, we’re much, much closer to the end than the beginning, and an unemployment rate hitting bottom may signal that as clearly as the ringing of a bell”.

Meanwhile, Morgan Stanley Chief US Equity Strategist Michael Wilson has noted “changing attitudes toward risk assets”.

“Our suspicion is that this rally may prove to be a bull trap that provides the perfect opportunity to position more defensively,” he wrote in a report.

Markets shrug off start of trade war but “risks skewed towards downside”

Markets had a mixed performance last week. While the S&P 500 rose 1.5 percent and the STOXX Europe 600 rose 0.6 percent, the Nikkei 225 fell 2.3 percent and the Shanghai Composite fell 3.5 percent.

All major markets did rise on Friday, shrugging off the start of the US-China trade war as the US implemented trade tariffs against China and the latter retaliated.

The S&P 500 was among the bigger gainers on Friday, rising 0.9 percent on the back of a US employment report showing an increase of 213,000 jobs in June.

Some analysts remain concerned about the trade war.

Konstantinos Anthis, head of research at ADS Securities, wrote in a note: “Whether this is a sign of complacency or a suggestion that investors have grown accustomed to this continued spat remains to be seen, but in any case caution is advised.”

Mark Cliffe, chief economist at ING, wrote: “There is limited evidence so far that protectionist measures are derailing the global economy, but growth risks are skewed towards the downside over the summer.”

Markets mostly up, US economy seen on “solid footing”

Markets were mostly up on Thursday.

The S&P 500 rose 0.9 percent and the STOXX Europe 600 rose 0.4 percent.

However, Asian stocks fell amid continued concerns over a trade war. The Nikkei 225 fell 0.8 percent and the Shanghai Composite fell 0.9 percent.

However, trade concerns in Europe were somewhat alleviated after a report that a US official had told Germany’s auto chiefs that the US would be prepared to stop threatening to impose stiff tariffs on cars imported from the European Union if the bloc gets rid of tariffs on US cars.

Apart from trade issues, monetary tightening by the Federal Reserve was also in focus on Thursday. Minutes of the last Fed policy meeting showed that there was broad support for continued “gradual” rate increases and that the benchmark federal-funds rate was expected to be at or above its “neutral” level “sometime next year”.

Some analysts appear comfortable with that. Mike Loewengart, vice president of investment strategy at E*Trade, said that “to keep things in perspective, more increases only bring us closer to a normalized rate environment” and that Fed officials “feel we are on solid footing”.

However, DataTrek Research co-founder Nicholas Colas warned on CNBC that consumer spending is on the verge of weakening.

“That’s the beginning of the economy rolling over, and with that stocks," said Colas.

Trade tensions “on the cusp of doing serious damage”

Markets were mixed on Wednesday.

The STOXX Europe 600 rose less than 0.1 percent while the Nikkei 225 fell 0.3 percent. The US stock market was closed for a holiday.

“There is still an underlying concern over global trade tensions, but for now there is a degree of consolidation setting in,” said Richard Perry, market analyst at Hantec Markets, in a note.

However, things could still get a lot worse. Economists at Deutsche Bank estimate that a full-blown trade war could shave off 1 percentage point from gross domestic product.

“It’s on the cusp of doing serious damage,” said chief economist Steve Blitz of TS Lombard.

France’s Council of Economic Advisors is even more pessimistic. It has estimated that the US and China could see a permanent loss of three percent of economic output and the European Union four percent in the case of a full-blown trade war.

Trade war risk may be underestimated, recession fears may become dominant

Markets were mixed on Tuesday.

The S&P 500 fell 0.5 percent and the Nikkei 225 fell 0.1 percent but the STOXX Europe 600 rose 0.8 percent.

“Broadly speaking, markets are getting a bit more concerned about trade, though as has been the case over the past six months, tough rhetoric is almost always followed by softer solutions,” Ryan Larson, head of equity trading at RBC Global Asset Management.

However, Lisa Shalett, head of investment and portfolio strategies at Morgan Stanley Wealth Management, thinks that investors may be underestimating the risk of a blowup in trade tensions.

“With uncertainty rising, we no longer believe that the implications of Washington’s trade talk are benign,” she wrote in a note. “What’s more, this intensified headwind to growth may be coming just as growth momentum in global trade has started to wane.”

Indeed, Nicholas Colas, co-founder at DataTrek Research, on Tuesday wrote that “growing fears of an economic recession” would be the dominant market narrative for the second half of 2018.

European and Japanese stocks tumble amid trade tensions, US stocks “best game in town”

Markets were mixed on Monday.

The S&P 500 rose 0.3 percent but the STOXX Europe 600 fell 0.8 percent and the Nikkei 225 plunged 2.2 percent.

European and Asian markets were weighed down by remarks made by US President Donald Trump on Sunday that the European Union has not been fair in its trade with the US.

In contrast, US stocks were able to reverse early losses to finish higher on the back of a rally in technology stocks.

Among economic data released on Monday, the Institute for Supply Management's manufacturing index for the US rose to 60.2 in June from 58.7 in May but the IHS Markit index for eurozone manufacturing fell to an 18-month low of 54.9 in June from 55.5 in May while the National Bureau of Statistics manufacturing PMI for China fell to 51.5 from 51.9.

Michael Pearce, senior US economist at Capital Economics, said in a note that “the strength of the domestic economy is more than offsetting any increased uncertainty on trade policy”.

Morgan Stanley chief equity strategist Michael Wilson said in a note though that trade tensions could weigh on stocks, with several 10 percent corrections in global equity markets at different points.

In the meantime, Jeff Reeves at MarketWatch said that US equities remain “the best game in town”, especially when compared to some large emerging markets like Brazil and China.

However, that did not stop Richard Suttmeier at Forbes from saying that US stocks are at risk of a bear market.

Stocks under threat in second half of 2018

Markets fell last week, with both the S&P 500 and the STOXX Europe 600 falling 1.3 percent.

Both indices saw gains for the second quarter though. The S&P 500 rose 2.9 percent while the STOXX Europe 600 rose 2.4 percent.

Last quarter's gain helped the S&P 500 finish the first half of 2018 up 1.7 percent but the STOXX Europe 600 still finished the first half with a decline of 2.4 percent.

However, the S&P 500 may not remain unscathed in the second half of 2018.

Craig Johnson, chief market technician at Piper Jaffray, told CNBC last week that as the Federal Reserve tightens monetary policy, the spread between the 10- and 2-year Treasury bond yields is likely to continue flattening.

Johnson said that as the curve flattens and possibly inverts, economic growth could slow and equities could be hit, with the financials sector being especially affected.

Meanwhile, corporate credit markets are already showing signs of stress.

According to Bank of America Merrill Lynch, high grade bond funds have posted outflows for five weeks in a row, and high yield funds have posted outflows for 32 consecutive weeks.

“The credit cycle is past its peak, and credit tends to lead equities in signalling a maturing cycle,” wrote TS Lombard analysts in a note earlier this month.

Indeed, stocks already look vulnerable, according to John Hussman, president of Hussman Investment Trust.

Hussman noted that “present market conditions reflect not only extreme valuations” but also “deterioration in market internals”. He suggested that “investors should seriously consider the prospect of a market decline on the order of -65% from the recent market highs”.