Last week the US stock market began to decline following the recent fall in the US government bond market through key technical levels. Nonetheless, the negative correlation between the two remains. The S&P500 declined by 3.3% on Wednesday, the biggest fall in eight months. While the 10-year Treasury bond yield rose to as high as 3.26% on Tuesday and has since declined to 3.15%.

Below are the reasons for the increase in volatility in equity markets;

Rising bond yields

Undoubtedly the proximate cause of the stock market reversal. Last week’s bond rout was caused by rising economic optimism, but the severity of the reaction in fixed income — the 10-year Treasury yield raced to a seven-year high of 3.3 per cent — has been sufficient to unnerve equities as well.

Short-volatility bets

The February turmoil also triggered rising yields, but was exacerbated by the collapse of two exchange-traded notes that bet on stock markets remaining tranquil through complex derivatives contracts called Vix futures.

Stock market rotation

One of the most notable developments in the US of late has been the abrupt reversal of winners and losers. Unloved stocks that have lagged behind the 2018 rally have performed much better, while the biggest casualties have been previously high-flying companies and sectors.

Global growth outlook

The extent of the praise that Fed chair Jay Powell heaped on the US economy last week surprised some, but the American economy’s outperformance has been one of the key trends for markets this year. However, it has come as much of the rest of the world has slowed.

Systematic strategies

There are many computer-powered investment strategies that systematically scale their market exposure according to volatility. So when markets turn choppier they sell, and when turbulence simmers down they buy.

Conclusion

So far, last week's stock market plunge was a natural correction. Markets tend to go too far in both directions. The U.S. economic story so far remains positive one with inflation is under control. The fundamentals are still very strong.

Earning season just kicked in. Investors will continue to watch companies closely to see what they will report for the third quarter of 2018. However, what’s most important is their outlook for the fourth quarter as well as for 2019 and beyond.

 This article was issued by Kristian Camenzuli, investment manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice. advice