Hong Kong
This week’s harrowing sell-off in US equities presents a buying opportunity as economic fundamentals are still looking good, according to UBS.
The S&P 500 Index has declined 6.7 per cent over the past six sessions, slightly more than the losses in global stocks. The MSCI World Index, down 6.3 per cent in the period, stabilised early Friday as the slump showed signs of easing.
“The bull market remains intact,” analysts including Jason Draho from the bank’s chief investment office wrote in a note. “While the fundamental outlook has not changed notably in the past two weeks, the valuation of US stocks has improved,” they wrote, advising clients to retain a “modest overweight” to global equities.
Equity markets in the US have sold off this month alongside rising Treasury yields, two months after the current bull run became the longest streak without a 20 per cent drawdown. On Thursday, the S&P 500 tumbled 2.1 per cent, capping the worst two-day slump since February. A gauge of stock volatility spiked to an eight-month high.
“This happened despite no notable earnings news,” and weaker-than-expected inflation data that lifted equity futures, the UBS report said. “Today’s volatile market action is reminiscent of technically-driven selling.”
UBS attributed the volatility to forced selling by funds that target specific levels of portfolio risk — the same funds blamed for February’s selling — which “is amplifying the weakness initially attributable to fundamental concerns.” “Consequently, markets may not stabilise until the forced selling abates and fundamental buyers step in,” the analysts wrote.
Risks related to trade, China, Italy or the US midterm elections could yet rattle markets, while guidance given during US earnings season may provide stability, they said. Banks including Wells Fargo & Company and JPMorgan Chase & Co. are due to report third-quarter results Friday.
