Stocks Fall, Trump Blames Fed, USD Mixed in Red October

By CurrenciesOct 11, 2018 03:42AM ET

www.investing.com/analysis/stocks-fall-trump-blames-fed-usd-mixed-in-red-october-200347950

Stocks Fall, Trump Blames Fed, USD Mixed in Red October

By | Oct 11, 2018 03:42AM ET

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There must be something with October that triggers historically sharp reactions in the stock market. And this October is no different: MSCI’s all-country world stocks index falls to lowest since early February.

In some parts of the world (Italy), shares of Banca Carige are down as much as 10.2% in early trading, and many wonder if the carnage will continue in the hours and days ahead.

But the truth is, that this looks merely like a correction. So-called “healthy corrections,” the pullbacks after many all-time highs are only normal. Nothing rises forever and in a straight line.

At this point, the U.S. equity market that sparked the worldwide move seems only to correct a bit. Will sellers push prices even lower, or buyers will make the most of this dip and step in?

Trump doesn’t help either. He even openly blamed the Fed as running tight monetary policy. In fact, the words used were that the “Fed has gone crazy.”

Is it? A quick look at the historical interest rate cycles in the United States, and we see that the real effective Fed funds rate, or the so-called core PCE (Personal Consumption Expenditure) deflator, is barely touching positive values after being negative for over a decade.

To compare with, in the late 70’s and 80’s, the same core PCE deflator ran as high as ten percent, dwarfing the recent Fed’s double tightening cycle. Therefore, no worries whatsoever regarding the Fed’s policies. If anything, the Fed looks too complacent when compared with how the United States economy is running.

As such, it is no wonder the USD is mixed ahead of CPI and end of the week. The USD/JPY is the first to suffer as it correlates with the risk-off environment. Naturally, the EUR/AUD caught a bid via indirect flows out of the Aussie (AUD/USD) pair.

Before judging the sell-off as a “bloodbath,” let’s not forget that the U.S. equity markets made over a hundred all-time highs since Trump’s election. They make this pullback insignificant, compared with the tremendous rally so far.

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Stocks Fall, Trump Blames Fed, USD Mixed in Red October

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