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Trading  | March 19, 2018

By Mark Cudmore, former Lehman trader and current Bloomberg macro commentator.

Macro View: Equity Markets Are Likely to Have Another Swoon

Almost all the most important inputs point to lower prices for global equities before the bulls can regain control.

Volatility across assets remains elevated. Importantly, the VIX can’t fall back below the crucial 15 level. Feb. 2 saw the fear gauge close above that mark for the first time in more than five months; it’s has managed to close below only once since. Long-term moving averages of swings continue to rise and that constricts risk-taking limits at financial institutions and erodes investor conviction.

Liquidity is still being squeezed. The rise in Libor may not be related to any bank stress but it still amounts to dearer funding costs. Two-year U.S. yields are at the highest since before Lehman Brothers collapsed. The 3% yield level may have held for 10-year Treasuries but they are hardly rallying rapidly.

Credit, both investment grade and high yield, continues to trade poorly, a reflection of diminished liquidity across markets and a fundamental outlook that’s less than appealing.

Global trade tensions will remain elevated for at least another few weeks, while we await the U.S. decision on China intellectual property theft and then the Treasury’s April report on FX manipulation.

Global political risks continue to mount: the personnel turnover in the U.S. administration, Japan’s land scandal, lack of Brexit clarity, Italy’s struggle to form a government, Russia’s spat with the U.K. are just some hot-button issues.

The recent broad losses in commodities constitute a warning signal on China – it doesn’t matter whether it’s a reflection of financial deleveraging or a negative outlook on the real economy – particularly as industrial metals are leading the declines.

Global growth may be solid but it’s hard to see where the upside for earnings growth is going to come from in the context of the large upward revisions early this year and also the looming threat of increased protectionism.

I turned bearish on global stocks in this column on Jan. 31, and have since repeatedly said that equities won’t find a solid base to bounce from until yields cool, investors deleverage and bears prowl openly. There are signs of the last requirement but the deleveraging seen has been insufficient relative to the level of U.S. yields.

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