All I want for Christmas.

That’s a comment you will hear a lot this time of year and none more so than stock traders. For bond traders, Christmas or rather the Holiday Season came early. However, there may be a little pullback as the market digests $75 bio of treasury issuance and an inflation number due shortly.

For equity traders, the past six weeks have been a horror movie with many traders looking eagerly ahead to when the rot stops. But it won’t just yet. There are too many moving parts. A trade deal between the U.S. and China looks distinctly off the cards and China would have to feel somewhat peeved and misled by the U.S.

The arrest of the Huawei CFO whilst Trump was negotiating with President Xi could be seen as somewhat cynical. The ire shown towards Canada by the Chinese and the recall of the U.S. Ambassador in China shows that the Chinese are not impressed.

Equity markets have been lulled by the false sense that a heuristic algorithm provides and missed the obvious signals. The Fed tightening,  a lot of nasty geopolitics, rates rising, bond yields have risen, corporate spreads widening and leveraged loans and high yield are starting to show signs of wear and tear.

The momentum trade is starting to no longer look like an option.  However, whilst stock traders cling to the belief, then stocks can fall much further. This is not the same as in 2016. Volatility is increasing – some algo derived – and some just traders zagging when they should be zigging.

Obvious mistakes are being made and in some ways, the stock traders are being played as fools by the Trump Administration because all Trump has to say is that he has done a wonderful job and he thinks a deal can be made. The market rallies and then the traders end up with egg all over their faces.

For hedge funds, this last week is a disaster. Gross leverage climbed to 234.5% with equity hedge fund exposure growing at the fastest rate this year. The industry is heading to its worst year since 2011 and the Equity Hedge Fund Index is down 6% since January compared to flat returns in the benchmark index.

December has been bad for stocks with almost $1 tr of value written off the value of stocks. Apple has plunged 5.4%  and saw its value fall by $54 bio whilst Amazon’s slide saw $24 bio wiped off its value.

Credit is also suggesting that stocks may have further to fall. Investment grade spreads are now at the widest since September 2016. Investments in bonds are providing some respite with bond yields rising sharply and providing better returns.

Stocks are starting to get on edge about the economy and probably for good reason. The latest payrolls showed wages rose less than forecast whilst jobs growth was steady. The issue is that meaningful jobs are not being created. Wages are stalling because productivity is weak and U.S. companies have not made any meaningful capex expansion outside of tech and some industrials and in particular those aligned with the military.

The Fed seems likely to hike again shortly and Trump wants $750 bio for his wall. At some time the bond market will awake with the bond vigilantes trashing the treasury market as the budget deficit increases and tax receipts stall.

Spending will fall as people realise some deductions are no longer available and for the middle class, that means an increase in taxes. Notwithstanding there is an issue with healthcare as the two largest for-profit healthcare providers duke it out over doctors and care provided. This means for some, what they thought was covered in an emergency is not.

And in a sign that perhaps all is not so well, can be traced to Lael Brainard’s Friday speech. In the speech, Brainard was guarded on the economic outlook and commented on tightening financial conditions. Not what the equity market wanted to hear. Brainard is linking rate hikes with economic growth. December’s rate hike looks likely but with Brainard, Powell, and Kaplan all providing reservations and with an increased likelihood of a trade war, growth may be slipping away.

Market Recap.

Equities: The S&P 500 fell 2.33% and the Dow fell 2.24%. The Vix closed at 23.23. while the Stoxx rose 0.6%.

Currencies: The Bloomberg Dollar Index fell 0.1%, and the yen rose 0.1% and the euro rose 0.3%.

Bonds: (as at 4.31pm). The ten-year is trading at 2.858%. The 2-year is trading at 2.719% and the 30-year is at 3.147%. The ten-year bund closed at 0.253% and the OAT closed at 0.688%. The U.S. curve closed on the day with the following closes 2/10 at 13.2bp, 2/30 at 42.7bp and the 10/30 closed at 29.1 bp. The U.S. 5-year closed at 2.701%.

Commodities: WTI rose 1.9%  and gold rose 0.9% and copper (LME) rose 1.2%.

Bitcoin is trading around $3572.

Aussie Market Today.

Equities are likely to follow the offshore lead and weaken. Any positive developments regarding Huawei would be bullish for the region. However, that looks like a forlorn hope at this stage. Equities are vulnerable and Friday’s rally probably has a few anxious parties looking to square away their positions.  A weaker dollar could assist commodities but the trend appears to be one of weakness.

The strength of bonds should remain.