We often hear “market sell off” or “rally” in the financial market. What does it mean and what can you take in from this? This article will explain this term by using this current market real data.
To the very basic, “sell off” as the name suggest it means you are selling and others are selling so therefore majority of the market investors are selling. But selling what? It can be shares (so equity), bonds (so that’s debt) or currencies (FX). To break it down, if market sell off, it usual means for example equity prices are down and yields of bonds are up (hence bond prices are down). Imagine a lot of people are selling a book on eBay then because of the high supply of selling then the price as a result of that will be falling.
So with that simple term explained let’s take a look at what happened to the market this week (week ended 12 Oct 2018). The key day was Thursday when US inflation data out showed the inflation rate rose by 2.3% in September compared to last year. Also last week Amazon, which is a major employer in the US announced it would be raising its minimum wage for all workers to $15 per hour and it’s likely that other global companies will follow. This made investors think once more that wage growth in the US is going to rise and this will feed through to higher rates of inflation and therefore higher rates of interest.
So what happened after this data being released? Equities around the world started to sell off (see chart below). But why? If inflation is high, then central banks generally will increase interest rates to stop the economy overheating. With increased inflation, US Fed is likely to continue its recent policy of raising interest rates in Dec through 2019. When there’s higher yield return in interest rates then it means government bonds offer a better return than risky equity shares as it’s less predictable returns from equities. To give you what actually happened on Thursday, markets in China hit their lowest level since 2014 while European shares touched their lowest in 21 months.
Chart Credit: TradeView
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