Markets Edition: Volatility is Back
KEY TAKEAWAYS
- Volatility Returns on Renewed Trade Fears: Unexpected US-China trade tensions have reintroduced significant volatility. The threat of a 100% US tariff on Chinese goods and China's new restrictions on rare earth metals have shaken markets, causing a nearly 3% drop in U.S. equities in a single day.
- A Window for Diplomacy Remains: Despite the harsh rhetoric, the proposed measures are not immediate. China's export controls are slated for December 1, and the threatened U.S. tariffs for November 1. This timeline provides a potential window for negotiation, possibly ahead of the APEC forum at the end of October.
- High Stakes for Earnings Season: Markets are entering earnings season with elevated expectations and "stretched valuations," especially in the U.S. (trading at a 99th percentile P/E multiple). With upgrades already priced in, there is a high bar for companies to meet or exceed forecasts, posing a risk if earnings per share (EPS) fail to deliver.
Beata Manthey, Head of European Equity Strategy, and David Groman, Senior Global Equity Strategist, discuss why they see volatility in store for the markets. Headwinds like the latest U.S.–China trade tensions and a slowing U.S. labor market are in a tug of war with tailwinds from expected Fed rate cuts and AI enthusiasm. Corporate earnings reporting kicks into gear this week, and with expectations high while valuations are stretched, how well companies deliver against those expectations is likely to fuel volatility further still.
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Beata Manthey, Head of European Equity Strategy
Beata Manthey is Head of European Equity Strategy in Citi Research. She joined Citi in 2007 as a Global Equity Strategist. Beata is part of a team that focuses on broader equity market issues. Prior to joining Citi, she worked at the European Bank for Reconstruction & Development.
David Groman, Senior Global Equity Strategy
David Groman is a Director on the Global Equity Strategy team at Citi Research. Prior to joining Citi in 2021, he served as a Financial Economist at the U.S. Department of the Treasury. He has also worked as a cross-asset macro strategist at Goldman Sachs in New York.
