The day started well with news that a breakthrough in Brexit negotiations had been reached. Stocks recovered after nearly falling 1% at one point. All that mirth was to no avail as stocks fell, after recovering, because of mounting concerns over the pace of global economic growth. Investors are worried that global growth may have peaked at a time when the three major central banks are either tightening or simply not purchasing bonds and liquidity is tightening.
Oil rallied and that’s probably the day’s talking point. After 12 straight days of losses, oil steadied and broke the $57 a barrel level. Gas surged as forecasters are predicting an unseasonably cold weather pattern is likely to threaten the North East of America. For HY, the stall in the fall was heartening.
However, BBB rated securities credit fall has been problematic and possibly the worst year since 2008 when some 15% of the BBB universe were energy stocks. Energy has fallen but also rising yields have led to a healthy slide in price. Energy also accounts for 15% of the high yield universe and the fall in oil prices have seen spreads surge higher.
The surge in spreads for junk is unlikely to slow anytime soon. For the same reasons why the spreads tightened, they will cause spreads to widen. As investors withdraw from junk ETFs, bonds must be sold and that selling will force spreads higher and yield higher resulting in falling prices. And every time someone sells only exacerbates the problem. Some $1.2 bio has been withdrawn from the sector recently.
On the day, stocks are once again weathering a storm. Tech stocks continue to weigh on stocks with Apple leading the decline. Concerns are mounting again over whether Powell will tighten. And with the CPI jumping 0.3% in October up from September’s 0.1% read, pressure is building.
To be fair most of the rise was in gasoline and with the fall in oil prices this rise may be erased over the coming weeks. It is worth noting that underlying inflation remains steady. If the Fed sees a slowdown, it may back away from tightening until it sees economic conditions improve.
Trump’s nightmare on trade looks likely as key Democrats are demanding changes to legislation relating to NAFTA. The Democrats want enforcement not changes if Trump’s NAFTA deal is to be approved. Concerns are being raised over both labour and environmental issues. On trade, Europe appears to have drawn a line in the sand and autos appear to be the beneficiary. The issues surrounding trade are unlikely to change dramatically anytime soon.
Equities: The S&P fell 0.66% and the Dow fell 0.81%. The Vix closed at 21.07 while the Stoxx fell 0.6%.
Currencies: The Bloomberg Dollar Index was flat, the euro rose 0.1%, and the yen was steady rising 0.1%.
Bonds: The ten-year closed around at 3.12%. The 2-year closed at 2.862% and the 30-year closed at 3.362%. The ten-year bund closed at 0.397% and the OAT closed at 0.7822%. The U.S. curve closed on the day with the following closes 2/10 at 25.8 bp, 2/30 at 49.8 bp and the 10/30 closed at 24 bp. The U.S. 5-year closed at 2.953%.
Commodities: WTI rose 1.8%, natural gas was up 16% and gold rose 0.6%.
Bitcoin is trading around $5438.
Aussie Market Today.
The trend continues for equities and today should be a risk off day as equities continue to stall in the U.S. and elsewhere. Global growth appears to be the main concern and as Australia is a commodity nation, concerns are mounting.
Bonds should be better bid on the day, as that was the tone from offshore.
The Aussie dollar continues to hold despite a strong dollar and commodities stalling. With an outlook that is biased towards slowing, the Aussie looks vulnerable to a fall.