Self-doubt?

This week we will be looking at Fed-speak and all the derivatives therein, diving into what the gods of the Fed are thinking and then trying to act pre-emptively.

For traders, the first concern is – will the Fed change course? Has the Fed become distracted by the equity rout over the last few days? This week we have a number of voting members speak and the speakers start Thursday.  The vice chairman of supervision, Randal Quarles, speaks on Thursday on the economic outlook.

Why are the events of the past few days important? The selloff caused bonds to reverse a trend of weakening. Last week, the 10-year treasury saw a high 3.26% before falling to 3.16% Friday. Its spread over the 2-year narrowed back to about 30bp. And all this on the back of threatened trade conflicts and a slowing global economy.

So far the Fed has said that they expect three more hikes in 2019 and the market has a high probability of one more hike in December. For many pundits though, the first signs of potential slowing of the rate of hikes will be seen in the housing market. Historically, the housing market shows the first signs of stress and any stress there could lead to a pause.

So for the week, we saw a plunge of between 3% and 4% on the U.S. indexes. For those used to low market volatility, this was somewhat of a shock. The most disturbing part – and this is the part that equity traders should prepare for – is that most hedges did not work.

There are a number of factors that need to be considered:

  • Liquidity is no longer guaranteed. Valuations and fundamentals will become increasingly important and the momentum trades so loved and favoured by algo traders will diminish.
  • Global economic divergence is muddying the waters.
  • The dispersion in asset prices is straining markets. This will create opportunities for those who pick economic growth elsewhere and which countries will achieve higher growth rates.
    Trade tensions are unsettling markets and creating uncertainties.
  • Volatility is rising. This is the first calendar year in seven to feature a single day 3% loss. The average volatility for 2018 is 15.2 and for 2017 it was 11%. That’s a 37% increase in volatility.

There is an old saying what goes up must come down and that’s what Tech did Friday except tech reversed its downward spiral. Tech rose 2.8% over two days on the NASDAQ. For many, the recovery on Friday was due to relaxing of tensions between China and the U.S. Trade data out of China was certainly a factor as the Chinese economy is not slowing as fast as some expect. Bank earnings remain solid and that helped sentiment.

Emerging markets staged a major recovery and none more so than Turkey. Turkey released the U.S. Pastor Andrew Brunson and the Turkish lira rebounded strongly.

For those looking for some Uber, then Uber is coming to market with an inaugural $1.5 bio bond offering.

China’s offering of US$3 bio Reg S drew orders of 4.4 times the issue. The issue was well received with 67% going to Asia, 29% to Europe and the remainder to U.S. accounts.

Market Recap.

Equities: The S&P rose 1.4%  and the Dow rose 1.15%. The Stoxx fell 0.3% while the Vix closed at 21.31.

Currencies: The Bloomberg Dollar Index rose 0.1%.

Bonds: The ten-year closed around at 3.167% while the 2-year closed at 2.86% and the 30-year closed at 3.338%. The ten-year bund closed at 0.499% and the OAT closed at 0.868%. The U.S. curve closed on the day with the following closes 2/10 at 30.4 bp, 2/30 at 47.8 bp and the 10/30 closed at 17.2 bp. The U.S. 5-year closed at 3.022%.

Commodities: WTI rose 0.4% while Gold fell 0.5%.

Bitcoin is trading around US$6,213.

Aussie Market Today.

The ASX will see some respite today. Most likely the market will continue its rally and Asia looks as though it may rally as well. Just watch the signals out of Asia and especially, China. Sentiment can change very quickly.

Bonds look vulnerable to selling pressure. There was not much joy out of the U.S. and a small change in sentiment could see a selloff. Markets remain vulnerable. The interest differential is still wide. However, at this stage, it appears as though the currency is taking the hit.

The Aussie remains vulnerable as the interest differential between here and the U.S. remains negative. And with a drought and a possible slowing of the economy, it looks vulnerable as a trend. An uptick in commodities will help but a strong dollar could slow that move.

The direction for markets appears to be strongly influenced by Asia. Look north for some guidance.

Geopolitical risks remain high.