The equity market continues to stumble and bumble along as the day wears on. After a robust opening for both equity and bonds, equities slid as the day progressed. The driver of the activity came from several directions, one component being the Tech sector and especially the FANG stocks.
Over the past week, Facebook has fallen some 13%. Given the FANGs are now such a large component of the indices, any significant shift translates to a seismic shift in the indices. The other reason being we have a longish weekend and investors are squaring their books, rebalancing portfolio positions for quarter end and looking for safe havens, i.e. risk off, meaning buying bonds.
Volatility is back and for many, this is the first time they have experienced volatility. It will be interesting.
Bonds rally because they now are the stark alternative and are the risk off trade. With rates now giving a better return than dividends, bonds are also starting to attract more investors looking for income and the return over the month for the bond sector was 0.68%.
The problem for equity investors is that the morning session is fruitful. However, the afternoon session sees consistent selling. This, in turn, has meant that investors are also not buying the dips.
The bond rally does come as a little surprise this week because of the record issuance this week. Speculators held large short positions ahead of the T-bill auctions. The possible trade war led to buying of bonds leading to the cutting of the record short positions.
The stumbling of equities and the rallying of bonds was mirrored across the pond in Europe. The 10 -year bund has fallen below 0.5% on trade fears bonds across Europe have performed this week with 10-year BTP yielding 1.83% the lowest the Italian bond has been since November.
What makes today even stranger is that the fourth quarter GDP growth for the U.S. was revised up to 2.9% annualised for the final quarter from the previously reported 2.5%.
The yoy growth was 2.3% for 2017 which was up from 1.5% in 2016. After-tax corporate profits rose 1.7% in the fourth quarter after rising 5.7% in the third quarter.
Equities: The S&P 500 fell 0.3%. The Dow was flat and the Stoxx 600 rose 0.5%. The Vix closed at 22.87.
Currencies: The Bloomberg Dollar Spot Index rose 0.6%. The euro fell 0.8%. The pound fell 0.6%.
Bonds: The ten-year closed around at 2.78% after trading below 2.75% at one stage in the afternoon. The 2-year closed at 2.286% and the 30-year closed at 3.02%. The ten-year bund closed at 0.499 and the UK gilt closed at 1.365% and the OAT closed at 0.731%. The U.S. curve closed 2/10 at 49.5 bp, 2/30 at 73.5 bp and the 10/30, closed at 23.8 bp. The U.S. 5-year closed at 2.596.
Commodities: WTI fell 0.9% on concerns of increasing inventory. Gold fell 1.5%. Copper fell 0.1%.
Bitcoin is trading around $7,896.5.
Aussie Market Today.
Equities should be relatively quiet for the day. Depending on how books are positioned there may be some movement due to end of quarter rebalancing and long weekend squaring of positions. Most likely, the market will drift. Geopolitical interests will continue to affect the market.
Any escalation of the tariff spat with China could see further risk off positions being added to and that appears likely given the recent discussion between China and North Korea. For U.S. interests, this does not appear to be heading in the direction the U.S. would want and it provides leverage for China over the U.S.
Bonds are in a risk off mood and as such are in demand. Given its a long weekend and markets are closed for an extended period, bonds are likely to drift off on the day as traders’ wind back positions. I am not expecting any major moves unless something major of a geopolitical nature occurs.