Why is the Bear beating the Bull?

Team Veye | 15-Oct-2018 Bear beating the Bull

Dow Jones dropped more than 800 points last Thursday, in one of the worst sell-offs during the past 8 months as investors worried that sharply rising interest rates would constrain the nation’s historic economic expansion.

One major reason was US President Trump’s trade war with China. Although the Trump administration has been talking about China for months, the trade war moved another level during late September with US slapping a 10% duty on $200 billion worth of Chinese consumer goods. With this move, the China tariffs are expected to jump to 25% in January. This trade stand-off could hurt both the U.S. and Chinese companies, by raising production costs and crimping consumer spending. It was quite visible, with not only the U.S. stock market dropping last week but China’s two main stock markets were hit even harder, with Shanghai down 5.2% and Shenzhen tumbling 6.5%.

If your think that the trade war was the only thing investors were reacting to, it’s incorrect. During late September, the U.S. Federal Reserve raised interest rates for the third time this year. Those moves are meant to head off inflation, which has been finally beginning to tick up as the U.S. economy gains steam. Since the Fed’s rate hike, 10-year Treasury yields, which spent much of year below 3%, have jumped to nearly 3.2%, one of its highest levels since just after the Great Recession. Rates on many types of loans, such as those for mortgages and cars, tend to be tied to the government bond. Higher interest rates hurt stocks by making bonds a comparatively more attractive investment, and by making it more expensive for companies to borrow and invest. The investors feel more inclined towards investing in government bonds as they appear more lucrative and it triggers withdrawal of capital from the stock market.   

During last week’s turmoil, Technology stocks were the worst affected. Traders rushed out of stocks that have been driving the US economy. Meanwhile, safe bets such as utilities and consumer staples were the only positive notes in the sell-off. 

This certainly had a ripple effect with the Stock markets across Asia dropping sharply this morning with investors reacting to the sell-off in the U.S. markets. The Australia’s benchmark ASX 200 dropped almost 2% immediately after opening on Thursday.

Going with Market experts, the US China trade concerns, US Federal Reserve’s interest rates as well as Crude Oil will play a key role in deciding the market trend in near term. 

So, is it time to press the panic button?  Certainly not, as the markets have already started recovering on Friday and accommodate these changes. But yes, the recovery process may not be as fast as the drop. However, it would be wise for the investors to keep a close eye on market trends and be ready with their contingency plans instead of being taken by a surprise. 


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