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Timothy Fox - Head of Research & Chief Economist
Mohammed Al Tajir - Manager, FX Analytics and Product Development
Published Date: 28 October 2018
Equity markets are likely to end October registering heavy losses, consistent with it being one of the most volatile months for financial markets historically. Trade concerns appear to be being vindicated by mixed earnings results, while rising interest rates are also being seen as a headwind to future growth. As a consequence the VIX index is reaching its highest levels since February while the USD index is probing 2-month highs.
That this is happening when US GDP is accelerating at an impressive 3.5% annualized rate is particularly striking. Markets are no longer able to see just the positives of the US growth cycle, but are increasingly anticipating the negatives that will follow after. Growth, while strong, currently appears to contain the seeds of its own undoing next year. Although GDP growth rates of 3.5% in Q3 and 4.2% in Q2 are clearly impressive, the breakdown shows a shifting dynamic that will likely result in it slowing in 2019.
Business investment only increased by 0.8%, while equipment investment rose by just 0.4%. Even more telling residential investment actually contracted by -4.0%, the third consecutive quarterly decline and consistent with recent monthly declines in home sales. From these it can be seen that consumers are still currently being propped up by the tax cuts of earlier in the year, but looking ahead businesses are becoming more concerned about whether this can be maintained, especially in sectors that are highly sensitive to interest rates. Net trade also subtracted from growth in Q3 after contributing positively in Q2, a trend that is also likely to develop further should trade disputes intensify.
Source: Emirates NBD Research, Bloomberg
Trade talks return to the spotlight
USD softens as risk appetite recovers
Risk assets perform
U.S. Federal Reserve becomes more dovish