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Commentary on financial market developments – October 2018


  • Stock market sell-offs
  • Brazil: the winner of the presidential election is Jair Bolsonaro


A wave of sell-offs hit global stock markets in October. In a single month, the US S&P 500 index gave back all its gains so far this year. The US market has dragged down virtually all major stock markets around the world. The only exception was the extremely profitable Brazil. However, it benefited from the outcome of the presidential election, in which the far-right candidate Jair Bolsonaro won.

The US economy grew by +3.5% of GDP quarter-on-quarter in 3Q, beating expectations that had forecast growth of only +3.3% of GDP. Nevertheless, the US stock market was hit by a wave of sell-offs. It is difficult to pinpoint a specific trigger for the sell-off, but possible reasons for the fall in share prices could be given. The US stock market has had 10 years of growth since the deep financial crisis, and stock titles are already very expensive. Moreover, over the past year, stocks have benefited from President Donald Trump’s generous tax and spending policies. However, the pro-growth factors seem to have been completely exhausted and negative factors are beginning to emerge more strongly. The Fed, the central bank, is raising interest rates because of accelerating inflation and has no intention of backing down. The yield on US 3M treasury bills, on which bank interest rates are based, has risen to 2.0% and is above inflation for the first time since the 2008 crisis. For the first time, US investors can collect a return on their cash holdings even after adjusting for inflation. The price of money is thus gradually rising and starting to crowd out less successful investments. This invariably puts pressure on the price of equities, which, if expensive, may not deliver a large enough risk premium over well-yielding, almost risk-free deposits. In the current situation, however, the sell-off seems to have been over for some time, after all the economy is not yet showing a slowdown and is doing reasonably well.

European markets have of course taken a ride along with overseas. In addition, Europe is plagued by major uncertainties over Brexit. Britain will leave the EU in the spring, but important treaties that clearly define the relationship between the UK and the European Union have not yet been negotiated at all.
The only market that has been able to resist the wave of sell-offs has been Brazil. It has flirted with the communist experiments of the last few decades, and the electorate chose to elect the far-right Jair Bolsonaro as president. Investors are looking to the right-wing president for economic reforms that should help the Brazilian economy.

In the Czech Republic, news from the corporate world is worth noting, as Petr Kellner’s PPF group has started the process to unify Air Bank, Home Credit and Moneta Money Bank. The banking institutions would continue to operate together under the Air Bank brand. The transaction is expected to close on 1 July 2019 and is subject to the approval of the relevant regulatory authorities.

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