Global Equity Rout to Persist with eyes on BoE, Italy and Brexit

Equity Analysis and News

• Defensive Stocks Outperform Cyclicals
• S&P 500 | Enters Correction Territory
• FTSE MIB | EU vs Italy
• FTSE 100 | Brexit Uncertainty Persists

Defensive Stocks Outperform Cyclicals

Another week of volatility as equity markets continue its descent. While US authorities continue to suggest that the move lower in stock markets is a healthy correction, a continuous decline may begin to provide angst among officials. The deteriorating risk sentiment looks set to persist as defensive stocks continue to outperform cyclical stocks as reflected in the spread between the US Industrial Sector ETF and US Consumer Staples ETF (Risk Sentiment Proxy).

S&P 500 | Enters Correction Territory

Having erased its gains for this year, the S&P 500 quickly moved into correction territory, falling 10% from its all time high. Rising concerns over the global growth prospects continue to weigh on US equity markets with soft tech earnings also adding to investor angst. The sentiment for US markets look to remain bearish in the near term as uncertainties regarding trade wars, Brexit and Italy persist, while US Mid-Term elections will also garner attention in the coming days. On a technical note, bears will be eying a close below the rising trendline from the 2018 low, which leaves the index vulnerable to testing 2600 level to the downside.

S&P 500 Price Chart: Daily Time Frame (Jan – Oct 2018)

FTSE MIB | EU vs Italy

Italian assets remain under pressure as the EU and Italy lock horns over Italy’s expansive budget. Investors will react to S&P’s sovereign credit rating decision, which could see a downgrade by one notch, similar to recent actions taken by Moody’s. However, while this may lead to initial selling in the FTSE MIB, markets have largely priced in a potential downgrade from S&P, which suggests that the FTSE MIB may in fact see a slight bounce. The February 8th swing low at 18420 is the initial target for sellers, which has been rejected previously. As sentiment suggests selling looks to resume, this level may indeed be tested yet again.

FTSE MIB Price Chart: Daily Time Frame (Sep 2016 – Oct 2018)

FTSE 100 | Brexit Uncertainty Persists

The FTSE 100 is on course to test YTD lows situated at 6840 as Brexit uncertainty persists. The following will see the focus turn to the Bank of England’s quarterly inflation report. Given the recent weakening in UK data, coupled with the global softness, the central bank could potentially lower their economic growth forecasts, while also downgrading their inflation outlook as CPI prices continue to dip. Elsewhere, eyes will be on the fiscal stance at the beginning of the weak with the Chancellor set to announce the latest Autumn budget.

FTSE 100 Price Chart: Daily Time Frame (Jan 2018 – Oct 2018)

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--- Written by Justin McQueen, Market Analyst

To contact Justin, email him at Justin.mcqueen@ig.com

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