Can you hear the drums?

If you can hear the drums then it’s a steady beat, drumming ever lower in pitch. And if you do then that’s no doubt the wailing of stock pickers wailing as their AI and picks continue down the market slippery slope. It appears the stock markets have caught something that’s turning out to be a bit worse than a cold.

And for all those petrol heads out there, the price of oil is falling. It’s not because everyone is concerned about the glut and that drillers and frackers are producing more oil. It’s all to do with a little tweet by #Potus that stated he did not believe the CIA and that he was a steadfast partner of the Saudis. Sometimes a tweet does not work and the sell-off in oil was collateral damage.

Apart from the tech wreck which is now unfolding, and I will address that a little later, GE is causing a massive disturbance in the credit markets. You see, GE is about to become junk. With a rating of BBB and has about $122bio of debt outstanding and on the steady descent into junk, GE is causing reverberations in the credit market. GE once was the apple of the markets’ eye.  Nothing could go wrong if you invested in GE, take the annuity. Well, that has now gone and the woes of GE are pretty much self-inflicted. And much of that can be traced back to the changing culture from engineers to bankers.

Times are changing. For credit, the big concern is now the indebtedness of companies and this is also something the Regulators cannot control. For GE, it has seen its January 2023 move from 2.8% earlier this year to 6.2%. The market is basically saying your restructure won’t work. These past 30 days, GE has moved some 134 bp.

By comparison, junk, which is also reeling of late from carrying too much debt and a weakening stock outlook, has moved as spread against Treasury’s from 316 bp to 410 bp. Suffice to say the volume of GE’s debt and its widening spreads are causing carnage in the IG indexes. The IG index was also beset with PG&E’s California woes. PG&E at one point was 500bp wider on litigation and bankruptcy fears.

Of greater concern is the leveraged loan market. That market is now in freefall. However, unlike IG credit returns are still positive with returns in the order of 3.8% versus a peak of 4.3%. The blowout in junk does have a silver lining. The relative value of junk versus stocks is now at 187 bp. Junk ETFs have recently been attracting money.

For stocks, what a day. The FAANGS simply were a disaster. Hedge funds started bailing a little while ago and now it appears that real money may be following suit. Certainly in a thin market, sellers have routed the market. Already there is talk that the Fed may have already overstepped with its tightening.

Certainly, the fall in stocks has cast doubt over oil and global growth. Oil has responded today by falling some 6.77%. Amazon was down 6% on the opening, closing the day down 1.1%. Retailers slumped after Target announced their earnings and the shares slumped 11%. Apple continues its slide, yesterday it was down 4% today it was down 3.6%. Since October it is now down 20% and firmly in bear territory.

For those interested in mining information there is a clear link now within stock returns of credit rating and indebtedness.  As a group, those firms with the highest debt are now faring badly.  Ground zero for stocks with high debt is now becoming a reality and for many, this will be a disaster. This is because many of those stocks borrowed to push stock prices higher through stock buybacks or higher dividends and ultimately CEO’s pay. The stocks were not higher because of improving metrics. The chooks may be coming home to roost.

In general, AA rated shares have fared better. For example, a basket of stocks that Goldman’s compiled with strong balance sheets are still up 2%. Those with weaker balance sheets are some 5% lower.

For many, Thanksgiving Day cannot come any quicker so that the selloff remains a distant memory. Markets are lurching towards the end of the year and also the various religious holidays and the selloff could not be coming at a worse time. Index funds, momentum funds, and passive funds were all clobbered today.

For Trump and China, there is now pressure to do something about trade. Trump needs stocks higher and optimism in the broader economy. Xi also needs a deal. Both leaders are under pressure and as such both need a deal. For Trump, his boast of a trade war being easy to win is quickly souring. Watch out analysts and traders you are about to get Trump’s ire if markets don’t improve.

Market Recap.

Equities: The S&P500 fell 1.84%. The Dow fell 2.21%. The Vix closed at 22.62. The Stoxx fell 1.1%

Currencies: The Bloomberg Dollar Index gained 0.5%, the euro fell 0.8%, and the yen fell 0.1%.

Bonds: The ten-year closed around at 3.061%. The 2-year closed at 2.804% and the 30-year closed at 3.314%. The ten-year bund closed at 0.353% and the OAT closed at 0.758%. The U.S. curve closed on the day with the following closes 2/10 at 25.5 bp, 2/30 at 50.9 bp and the 10/30 closed at 25.2 bp. The U.S. 5-year closed at 2.885%.

Commodities: WTI fell 7.06%, natural gas was down 3.83% and gold was steady. Comex copper fell 1.54% (Dec Contract).

Bitcoin is trading around $4,377.

Aussie Market Today.

It’s a risk-off day. Equities are likely to be sold. Hard to see much of a recovery today unless Xi says something about trade. Stocks were down in the major centres and the main theme was tech and mining. Commodities are generally down on a global growth story and outlook and that does not augur well for today. Sell.

Bonds are once again is risk-off mode and there now appears to be a general global consensus that global growth is slowing. Unless there is a major turnaround relating to tariffs then expect bonds to trade higher in price and lower in yield.

It should be a very good day if you are lucky enough to be long. The axiom of long and wrong won’t be the order of today I expect. Low returns may become the new norm.

The Aussie dollar rallied on a weaker dollar.